Thinking of donating your car or truck to charity?
At the end of the year, your tax-deductible coach turns into a pumpkin.
After more than a year of listening to tales of abuse by taxpayers and charities alike, Congress last month changed the law on vehicle donations to make it much more difficult to get a big deduction for handing off your car or truck (or boat or airplane, if you have one of those) to a charity.
Car donations have grown into a cottage industry. The Government Accountability Office found in a study last year that something like 4,300 charities accept vehicle donations and that in 2000 about 733,000 taxpayers took deductions for donating vehicles worth more than $500, which is the cutoff for reporting non-cash donations.
Together these donations lopped $654 million off the taxes owed by these donors, the GAO estimated. The GAO said it had no way to gauge whether the deductions truly reflected the fair market value of the donated vehicles, as the law requires, or whether, as many suspect, taxpayers were using values applicable to cars in much better shape than the ones they were donating.
In any case, when the GAO took a careful look at 54 specific vehicle donations and followed them through the entire process, it found that most of the charities actually netted 5 percent or less of the amounts that donors claimed as deductions. Many of the charities served as little more than pass-throughs, turning the vehicles over to auction houses and collecting whatever is left after towing, auction and other fees were subtracted. The GAO found that charities actually lost money on some cars.
So Congress, in the American Jobs Creation Act of 2004, decreed that after this year the rules will be a lot tougher.
Under the new law, a taxpayer who donates a vehicle worth more than $500 to a charity will no longer automatically be entitled to deduct the fair market value. Instead, the deduction will depend on what happens to the vehicle. If the vehicle goes to a charity that turns around and sells it, the donor will get a deduction equal to the proceeds of that sale. This may not be much. At the 5 percent figure the GAO found, a car valued at $3,000 under today's rules would yield a deduction of $150 under the new ones. If the charity makes "significant" use of the vehicle in its charitable work -- for example, if a program that provides meals to shut-ins regularly uses the donated car for its deliveries -- then the donor will be entitled to deduct the fair market value.
There are also much tighter reporting requirements.
Under the new rules, the charity will be required to provide to the donor -- and to the Internal Revenue Service -- an acknowledgment of the gift that includes the taxpayer identification number of the donor and the vehicle identification number. Further, if the charity sells the car without either making real use of it or doing serious repair or reconditioning work, it must include in the acknowledgment a certification that the car was sold in an arm's-length transaction between unrelated parties, and show the amount of money received for it. That amount will be the maximum allowable deduction for the donor.
Lawmakers specified that the IRS is to "construe strictly" the rules on use and repair. Minor cleaning and repairs, or brief incidental use of the vehicle by the charity, don't qualify, the report of the House-Senate conferees said.
Even in cases in which the charity does use the vehicle, entitling the donor to a deduction of its fair market value, the acknowledgment "would have to show the condition of the car, a lot more detail other than just that you donated a car," said Martin Nissenbaum, a tax expert at Ernst & Young, the big CPA firm in New York.
Charities that fail to comply, or that provide false documentation, would be subject to new penalties.
The rules will make planning more difficult for donors, who "won't know what their deduction is going to be until some time after they make" their gift, said Harvey Berger of the national tax office of accountants Grant Thornton. That will make it tough for taxpayers to figure out whether they'd be better off selling the car or donating it, he said.
"I think it will cut down on some car donation programs," Berger said. The good ones will likely survive, though perhaps in smaller form, but "some of the shady ones will decide this isn't worth the trouble."
Berger and others noted that the rules apply for donations valued at $500 or more, and several wondered aloud if there will be a rash of "$499 cars" being donated next year.
In any case, Berger said, there will probably be a lot of advertising for last-chance donations between now and Dec. 31.
But donors should be cautious, even this year, several experts said. Although the old rules will apply, donors should be prepared to back up their deduction with more than a used-car price guide. Several suggested that taxpayers keep photographs of the car and perhaps a mechanic's statement to attest that it was in tip-top shape, if that's what they are claiming.
The bill also tightened up in some other charitable giving areas, though these will mostly affect corporations.
One that a few individuals might encounter is a new set of rules covering donations of "intellectual property" such as patents. The IRS has been worried that donors are overvaluing these sorts of gifts and thus gaining excessive deductions.
Under the new rules, a taxpayer may initially deduct only his "basis" -- essentially, his cost of developing or acquiring it -- when donating a patent. However, if the recipient is able to make money from the patent, then the donor will be entitled to a deduction equal to 100 percent of such income in the first two years, then decreasing percentages over the next 10 years.
The idea, apparently, is that many donated patents aren't worth much, but in the event that you donate one that does actually produce income, then you get a bigger write-off.