A charitable trust is a non-profit organization that is exempted from paying tax under IRS code section 501(c)(3). It can also be defined as an educational, religious, medical or religious institution, which tries to provide some service to the poor and needy. Car charity is a form of charity. In this a person can donate a car to a nonprofit charity or religious organization. Such charities must apply for 501(c)(3) status with the IRS.

A person can donate his car to charity. In such cases the donor is given a charitable gift IRS Tax Receipt. The donors can donate their cars to their favorite charity. These charity institutions either raise cash for these cars through dealer auctions. They may also sell these cars to used car dealers. The net proceeds from the sale go into the trust's fund. Vehicle donations made to bona fide charitable organizations are fully tax-deductible. The IRS allows the taxpayer to claim a tax deduction on the value of his vehicle up to $500. The donor must have title to the vehicle, as this makes the donation procedure much easier.

The car charity is a win-win scenario for all involved. A donor is able to get rid of his old car without hassles. It also gives him a fat tax deduction. A charity gets money that it would not otherwise receive through cash contributions. A middleman or agent makes some profit through the process of soliciting, towing and selling the car.

However car charities can sometimes get out of hand. To avoid this, Congress recently passed legislation to limit taxpayers' deductions for donation of cars, trucks, boats or planes to the gross proceeds received by the charity. People who donate vehicles to charities for $500 or more need to receive a written notice from the charity with the gross proceeds of the sale, stating that it was sold in an 'arm's length transaction' between unrelated parties.