Beware of the many false claims. Beware of any charity or car donation center that uses any of theses phrases; "full fair market value", "maximum value", "maximum deduction" "huge tax deduction", "fully tax deductible" or "tax credit".

First, there is no tax credit allowed for a car donation. The IRS only allows a tax deduction. A tax credit and a tax deduction are two completely different things. In order to claim a tax deduction, you have to itemize on your federal income tax return. This is generally known as "filling out the long form".

The tax rules regarding the amount a donor can claim for a car donation changed effective January 1, 2005. If you donate your car to charity, the amount you can claim for your tax deduction depends on two things; what the charity does with your car and the fair market value of your car on the day you donate car.

The fair market value is the amount you can reasonably expect to sell your car in its current condition in the open market. Besides looking at local car ads, you can use several pricing guides to help you determine the fair market value of your car. Some of the more popular price guides are the Kelly Blue Book, the National Automobile Dealers Association guide and the Edmunds guide. They all will help you determine how to value your car based on its condition, mileage and accessories. Use the figures for private party sales not the retail sales. Beware of over estimating the fair market value of your car. If you do and the IRS chooses to audit your tax return, you will not only lose part of your tax deduction, you may have to pay interest and a penalty as well.

The other factor that determines the amount you can claim for your tax deduction when you donate car is what the charity does with your car. If the charity uses your car for their purposes, gives it or sells it a greatly reduced price to a needy person or makes substantial improvements to your car before selling it, you can claim the fair market valve as long as it is not more than the amount you paid for the car. These practices, however, are not the norm. Most charities sell car donations as-is. If the charity sells your car, you can claim the fair market value up to $500 or the amount the charity sells your car donation for if it is more than $500. IRS publications 526 and 561 will give you complete details on how to determine your tax deduction.

Beware of slick advertisements especially if you are concerned about how much of the proceeds the charity will get from the sale of your car donation. Radio and newspaper ads and billboards are very expensive. The donation centers that run these ads use a portion of the proceeds from car donations to pay for them.

Donating a car to charity can be a beautiful thing if you know how to avoid the pitfalls.