The Internal Revenue Service often acts as a helicopter parent. Whether you're giving away a car as a gift to a friend or donating it as a gift to charity, the IRS wants to know about it. Depending on the beneficiary of your gift, you could end up owing extra taxes or getting a tax break.
Unless you're giving the car to a charity, you might be liable for the federal gift tax. As of 2012, you can give up to $13,000 per year, per person, tax-free, regardless of whether the person is a member of your family. If you're married, you and your spouse can make a joint gift of up to $26,000 without triggering the gift tax. Any gifts in excess of the limit cause you to file a gift tax return. For example, if you're single, you could give your brother a $10,000 car and a college buddy a $10,000 car and not have to worry about triggering the gift tax because neither person received more than the annual limit. However, if you give either one of them two $10,000 cars, the $20,000 total gift would be over the annual limit and you would have to file a gift tax return.
Gift Tax Exemption
Just because you have to file a return doesn't mean you'll actually owe any gift tax. As of 2012, your first $5.12 million in lifetime gifts are exempt from the tax, but any portion of the exemption that you use up during your lifetime can't be used for your estate. For example, if you give your nephew a $25,000 car, you'll have to file a gift return because $12,000 of your gift is over the limit. However, unless you've used up your entire exemption, the gift will just reduce your exemption for future years rather than result in gift taxes due.
Donations to Charity
If, instead of a person, you make a gift of your car to a charity, the tax implications can go the other way. Charitable organizations include religious organizations, educational institutions and nonprofit hospitals. However, you can't make a donation to an individual, no matter how needy. For example, giving your old car to a single mom who just had her car stolen can't be a charitable donation, but if you give the car to a temple and the temple then gives it, by its own choice, to the single mom, you can claim a deduction for the donation.
Valuing Your Deduction
The IRS has strict rules for how you value your car donation on your taxes. If the charity sells your car, you can only deduct the selling price. For example, even if your car's blue book value is $8,000, if the charity sells it for $4,000, you can only deduct $4,000. However, if the charity uses your car, such as a hospital system using your old car to shuttle elderly patients to different hospitals around the city, you can use the fair market value.
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