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In terms of dollars in your pocket, you can never be better off by donating your car versus selling it, theoretically.  If you donate, you get an ‘income tax deduction’ equal to the ‘fair market value’ (FMV) of the car, assuming you itemize deductions.  Translating to dollars: multiply the FMV by your marginal tax rate.  Example: If FMV = $1,000. and marginal tax rate = 27% then federal tax is reduced by $1,000 times 27% or $270. (don’t forget the state rate). Compare the tax saved to what you get if you sell the car… that should be $1,000.

Donations of Automobiles, Boats, and Airplanes.
Starting on January 1, 2005, donations of automobiles, boats, or airplanes to charity must meet several additional requirements if the transaction is to qualify for a tax deduction.  Most importantly, your deduction is limited to the amount for which the charity sells the vehicle. If you plan to take a tax deduction of more than $500 for a vehicle donation, the charity must also provide you with a written acknowledgment that contains the following information:
-the donor’s name and taxpayer identification number
-the vehicle identification number of the vehicle
-the gross amount for which the charity later sold the donated vehicle, accompanied by the charity’s certification that it sold the vehicle to an unrelated party in an arm’s length transaction, and
-a statement to the effect that the donor’s tax deduction is limited to the amount for which the vehicle was sold.
This acknowledgment must be provided within 30 days of the sale of the vehicle by the charity, and you must attach it to your tax return for the year of the donation.

There are two limited exceptions to these new rules. First, charitable contributions of property that are the donor’s stock in trade, or held for sale to customers, are not subject to the new requirements. Thus, a contribution of a vehicle by an automobile dealer would not fall under these rules.  The second exception applies when the charity intends to use the vehicle, or refurbish it before selling it.  In that case, the charity must provide a certification of its intentions, rather than the acknowledgment described above, and the donor may make his or her own determination of fair market value. If the value is of the donated vehicle is more than $5,000, a qualified appraisal will be required.