Appraisal

• If you intend to donate an automobile with a value in excess of $500, you need a fair market value appraisal of the item at the time of the donation. Fair market value is the price at which a willing buyer and willing seller would transact the sale. You cannot claim appraisal fees as part of the donation, even if you get the appraisal for the specific purpose of donation to a qualified organization. You may claim the appraisal fees as a miscellaneous itemized deduction on Schedule A, subject to 2 percent adjusted gross income limit.
  
  

Deduction

• You can deduct the smaller of the gross proceeds from the sale of the vehicle by the charitable organization or the fair market value on the date of transfer. If the car increased in value from your original purchase price, you may have to reduce the deduction to the original purchase price. You may estimate fair market value with the use of a website like Edmunds.com or kbb.com. Use the private party sale price, with all considerations for model, extras and condition. You must take the deduction in the year of the donation, and you are limited to donations in any one year at 50 percent of your adjusted gross income. You must itemize deductions to take tax advantage of your donation.
  
  

Form 1098-C

• As of February 2011, if your contribution is $500 or more, you need a Form 1098-C from the charitable organization to prove your contribution. This form shows the gross proceeds from the sale of the vehicle. You must attach this form to your tax return or mail it to the IRS for the deduction to apply. If your car is worth more than $250 and less than $500, you must have a written statement or receipt from the charitable organization regarding the donation and the value.
  
  

Penalty

• You may be subject to a penalty if you overstate the value or adjusted basis of the donated vehicle. As of Feb. 2011, the penalty is 20 percent of the amount you underpaid your taxes as a result of the overstatement if your overstatement is 150 percent or more of the correct amount and you underpaid taxes by $5,000. The penalty is 40 percent if your overstatement is 200 percent or more of the correct amount and you underpaid taxes by $5,000. Most vehicle donations are not a value that will incur a penalty.