Accounting for car contributions
Suspecting that automobile donors inflated the price
of their gifts to charity, and thus overstated the associated
tax deductions, Congress last year mandated tougher
Now when you give an auto (or boat or other motorized
vehicle) to a charity, you can no longer automatically
claim its fair market value as your deduction if that
amount is more than $500. Instead, your deduction is
limited to the actual amount the charity received when
it sold the auto.
There are some exceptions that would allow you to claim
the fair market amount. If, for instance, the charity
uses the car, say, to deliver meals to homebound individuals,
or sells it at a bargain price to a needy person, you
then can claim the fair market value.
The key is to find out from the charity exactly what
is planned for your donation. You'll also have to get
written acknowledgement of your gift, with the price
noted, and attach it to your tax return. In the past,
you simply had to hold onto such receipts in case the
IRS later questioned the gift.
Environmentally friendly auto tax breaks
The tax deduction for buying a clean-fuel
car was supposed to drop to $500 last year. The
law was changed, however, maintaining the deduction
at the $2,000 level for 2005 returns. If you bought
one of these vehicles, be sure to claim your deduction
for it on the long Form 1040.
The news for environmentally conscious drivers gets
even better for 2006.
Purchase a clean-fuel vehicle this year
and you'll get a more-valuable tax credit, ranging from
$250 to $3,400. The exact amount will be based on a
complicated formula involving the vehicle's fuel economy
and its total expected lifetime fuel savings. The IRS
is working with auto manufacturers to certify specific
autos, such as the popular hybrids, and calculate precise
One drawback of the credit is that its full value applies
only to the first 60,000 eligible vehicles each automaker
produces. That means credits for especially popular
hybrid cars or trucks could be quickly gone. If you
don't get one of the initial models, you'll receive
a reduced credit.
Uniform definition of a child
There are several tax breaks that pertain to children.
Taxpayers often found the different requirements to
claim each break was confusing. So the IRS developed
a uniform definition of a child for tax purposes.
In essence, says Luscombe, where the IRS found a broader
definition of a child in any tax break, it applied it
to all of the child-related benefits.
"While the standardization was generally
supposed to be helpful, and it is more generous than
it had been, they also changed some of the tests, and
that could pose problems for some filers," says
The biggest hurdle is that what had been
primarily a support test now is primarily a relationship
test. This has led to some people who previously were
able to claim child-related tax breaks losing those