IRS and insurance rules for charitable car donations

Looking to make a smart financial move before the end of the year? Try donating a car you no longer want, need or use.

Donating a vehicle to charity may net you a hefty tax deduction. However, you need to meet certain requirements to qualify for the deduction. You should also reassess how the donation will affect your car insurance rates on your remaining vehicles.

So if you're feeling philanthropic, start by deciding on an IRS-approved charity you'd like to benefit. Just remember that the charity you select must be an IRS-recognized 501(c)(3) for you to get a tax deduction.

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1. Making a list of approved charities, checking it twice

Be sure to consult IRS Publication 4303, "A Donor's Guide to Vehicle Donations," as well as IRS Publication 78, which lists qualified charities. (Religious groups aren't listed, but they qualify as well.)

To go the extra mile, also check the Better Business Bureau's National Charity Report Index. It rates charities based on 20 different accountability standards.

Once you know a given nonprofit meets IRS qualifications, contact the charity to arrange the donation. Most will send someone to pick up a donated vehicle. Be sure to ask how the charity will use the car. Will it simply sell the car at an auction, as is commonly done? Or will the charity actually keep the car and use it--say, to transport kids or senior citizens?

The distinction is important because the IRS has gotten stricter about deductions for donated cars.

2. Doing the math on your deduction

For cars that will simply be sold for cash, you are allowed to deduct only the charity's sales price of the car--not the vehicle's market value. Your deduction is further limited by your marginal tax rate. For example, assume a charity sold a vehicle you donated for $3,000. If you were in the 28 percent tax bracket, your deduction would be capped at $840.

But you can deduct the full market value of vehicles that will be used on an ongoing basis by a charity for things like deliveries. So if you give away a car that will be used by the charity, and it has a fair market value of $5,000, your deduction will be $1,400, assuming a 28 percent tax bracket.

Regardless of how the car is to be used, be sure to get a receipt from the charity. If the charity sells your donated vehicle, it is required by law to send you a notice of the sale within 30 days advising you of the car's sales price.

3. Notifying your car insurance company

Once you've donated the car, contact your auto insurance provider to drop the vehicle from your policy. Provide your agent with your name and car insurance policy number, and the vehicle ID number.

With some insurers, a simple phone call will be sufficient. Others may require a written request to cancel insurance coverage.

Even as you donate a car and save money on your taxes and insurance, be aware that eliminating your insurance coverage could have the unintended effect of costing you more money elsewhere.

For example, if your donated vehicle was a second car that provided you with a multi-car discount, that discount will go away. Also, if your auto insurance and homeowners insurance are bundled with the same carrier and you get a break on your car insurance quotes and resulting premiums as a result, that discount may no longer apply.

In both cases, ask your insurer if any new, higher rates apply and whether there are other discounts for which you may qualify.