The Internal Revenue Service agrees that generosity is a good thing. Sometimes it even gives tax breaks to individuals who give things away, including cars – subject to a lot of rules, of course. You can’t just hand the keys over to your brother. In fact, you might even be liable for taxes if you do, depending on its value.
Giving a car as a gift does affect tax, but whether or not taxes have to be paid is determined by the value of the car.
The Gift Tax
The federal gift tax comes into play if you give a car to a family member, friend or any other individual. If the car’s fair market value is less than $15,000 as of 2018, you’re fine. The IRS lets you give away $15,000 per person per year without worrying about taxation. This limit tends to go up a little each year because it’s indexed for inflation, and if you’re married, it doubles. You and your spouse can each give away $15,000 to the same individual each year.
The IRS has its own definition of “fair market value.” It’s effectively what someone would pay another individual for a piece of property if neither of them was under duress to buy or sell it. The IRS figures that Edmunds or Kelly Blue Book can tell you how much this is. If the car’s fair market value is more than $15,000 – or $30,000 if you’re married – the IRS says you're responsible for the gift tax, not the person who received the vehicle. But you won’t have to come out of pocket for the money and your estate probably won’t have to pay it either unless you have an extremely large estate.
The Unified Tax Credit
The gift tax is hinged to the federal estate tax by something called the unified tax credit. Federal law gives every individual an estate tax exemption that’s also indexed for inflation, and it’s pretty generous. An exemption is the portion of an estate’s value that it’s not taxed on. It’s subtracted from the value of the estate and the estate would only be taxed on the remaining balance if any. This exemption covers the gift tax, too – thus the name “unified” credit.
Let’s say you’re single and the car you’re giving away has a fair market value of $16,000. You’re over the $15,000 annual exclusion but you still won’t have to come out of pocket to pay a gift tax on that extra $1,000. However, you will have to file a gift tax return – IRS Form 709. If you’re married, you have to file separate Forms 709.
When you file Form 709, the $1,000 shifts over to becoming your estate’s liability after your death. It’s subtracted from your estate tax exemption, and the balance then covers your estate.
The estate tax exemption for 2018 is a walloping $11.18 million per person, so you’d have to give a lot of gifts with values exceeding the annual exemption before it would be affected to any significant degree.
Gifting as a Tax Deduction
You might also be able to claim a tax deduction for your gift, but the rules are complicated. First, you can only take a deduction for a vehicle that you give to a “qualified charity,” not to an individual. A 501c(3) organization is a qualified charity, as are religious institutions. The IRS publishes a list of all qualified charities on its website.
You must itemize your deductions to be able to claim a deduction for any charitable gift. This means you can’t also take the standard deduction for your filing status, and the standard deduction often results in reducing your taxable income more than itemizing does.
The amount of your deduction depends on what the charity does with the vehicle. It’s equal to the car’s fair market value or, if the charity sells it, the sale price. In all likelihood, the charity will sell the car. This will at least save you a lot of aggravation, although the amount of your deduction will probably be less. But deducting fair market value involves numerous rules and conditions that must be met before you can do so and you might need the help of a tax professional to make sure you’ve met them.
Assuming you qualify to claim a tax deduction for the car, you must complete and submit Form 8283 with your tax return if the vehicle’s value or sales price exceeds $500. Make sure you document the transaction with receipts and a statement describing the vehicle.
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