Donating personal possessions can be an effective philanthropic tool, but the IRS has strict rules about how much may be deducted, as well as about how such donations are valued. In an ongoing campaign, the IRS is putting donations of cars under special scrutiny. Vehicle donations can be a good way to help support a favorite cause — and boost your tax deductions — when they are planned carefully according to IRS rules.
The first rule is that you can deduct contributions only if you file an itemized federal income tax return. Legislation permitting some deductions for taxpayers who don’t itemize has been introduced but has not yet made its way through Congress.
For cash gifts to public charities, you may deduct no more than 50 percent of your adjusted gross income (AGI) in any one year. When you give tangible assets, the maximum deduction is 30 percent of AGI. If you give more in any one year, the excess may be carried over to the following five years.
Donations of tangible assets — whether clothing, furniture, or automobiles — are tax deductible at their current fair market value. If the local thrift shop can sell your secondhand chair for $50, your deduction is $50.
Some charities will give donors an estimate of fair market value that can be used to substantiate deductions. Some provide a range of estimated values for various items. But many expect the donor to set the value. When this is the case, you can find some guidance by using a software program called ItsDeductible, distributed by software maker Intuit. The software guarantees that you will get at least $300 back in tax deductions or you can get a full refund on the software.
If all of your noncash contributions for the year have a fair market value between $500 and $5,000, you must attach Form 8283 to your federal income tax return. The form includes a description of the property, the date it was acquired and the date it was donated, its fair market value, and the method used to determine the value.
“Contributions in excess of $5,000 must be substantiated by an independent appraisal,” says John W. Roth, federal tax analyst with tax publishers CCH Incorporated. The fee for the appraisal may be included among miscellaneous itemized deductions on Schedule A of your federal income tax return.
Cars Are a Special Case
While automobiles are also tangible assets, donations of cars are under increasing scrutiny. Commenting on a December 2003 report by the General Accounting Office, Senator Chuck Grassley, chairman of the Committee on Finance, says: “Charities are receiving only pennies on the dollar from the donations of used cars. And the tax breaks individuals receive for these donations are costing the government millions of dollars a year.”
The same GAO report indicates that charities are being short-changed, often not receiving nearly as much benefit as donors believe they should. The problem is twofold. First, donated vehicles are often sold at auctions for much less than you might get from a private party. Second, when third-party agents are involved — as is often the case — vehicle processing and fund-raising costs are subtracted from sales revenue, further reducing the revenue actually received by charities.
Another potential problem lies in the growing number of scam artists pretending to be legitimate charities and advertising for donations of used cars.
There are a few ways to ensure that your car will go to a legitimate organization. The National Automobile Dealers Association has a fairly new donation program, available online at www.nadaguides.com or by calling 1-800-792-2095. Nada’s Vehicle Donation Center lists dozens of charities that accept donations. Some of the come-on ads suggest sizable donations may be taken for non-running clunkers, but Nada’s car donations must be in running condition. Another possibility is to donate a car to a local charity that will either use it — for example, to transport food to homeless shelters — or give it to someone in need.
Before you donate an automobile, follow these guidelines from the GAO and the IRS:
• Make sure the recipient is a tax-exempt charity by checking the IRS Web site (IRS.gov) or your state’s charity regulator (typically in the office of either the attorney general or the secretary of state). Churches, synagogues, mosques, and government entities automatically qualify as tax-exempt.
• Ask the charity whether the vehicle will be used by the charity itself or sold. If it will be sold, is the fund-raising program run by the charity or by an outside firm? If sold by an outside firm, what percentage of the sales proceeds will go to the charity?
• Deduct only the fair market value of the vehicle, described by CCH tax publishers as “what a willing buyer would pay a willing seller.” Fair market value is based not only on the year, make and model, but also on the particular vehicle’s condition and mileage. The used-car pricing guides known as “blue books” provide clues for making an appraisal, according to the IRS, but you should compare prices with sales in your area.
• Keep documentation — including newspaper ads for similar cars and photos of your vehicle showing its condition — to prove your case if your return is audited. The IRS is collecting data on tax deductions for noncash contributions as part of the National Research Program (a program of random audits), which is expected to be completed by the end of this year.
With charities advertising substantial tax deductions for clunkers that don’t run, increased attention can be expected from the IRS. It’s best to be prepared.
Grace W. Weinstein is a freelance writer based in Englewood, New Jersey.
Copyright 2004 Community Foundations of America
Used with permission