TAX TIP No. 41
You've seen the ads: "Donate your car and get a tax break." Technically, that's true.
But some people who give away an old auto might find their tax break smaller than they expected. And a few donors, thanks to the intricacies of vehicle gift guidelines, might be able to boost their deduction amounts.Giving away a clunker to a charity used to be straightforward. You could claim the old car's fair market value, that is, the amount a willing buyer would pay a willing seller for the product. Typically, you'd refer to auto valuation services, such as the Kelley Blue Book, to get an idea of the donated car's value, give it to your favorite nonprofit and then drive off with a tax break equal to that valuation amount. No more.
Because some taxpayers got greedy, the IRS tightened the rules on how much you can write off for a vehicle donation. The move to put the brakes on auto deductions shifted into high gear after a Government Accountability Office, or GAO, report found that the Treasury lost millions in taxes because of wide discrepancies between the value that some vehicle donors claimed on their tax returns and the actual worth of the donated cars.
Beginning in 2005, tax law changes have dramatically limited deduction amounts for some donated vehicles. The precise tax break depends on the donor's claimed value of the gift and how the charity uses the vehicle.
"This puts taxpayers in the unusual situation of not knowing the size of their deduction when they make the donation," says Bob D. Scharin, RIA senior tax analyst for Thomson Tax & Accounting.
$500 limit
In most instances, a taxpayer must take into account a $500 threshold on vehicular gifts. This value amount applies to autos, boats and even airplanes. When the donated vehicle's value (based on credible fair market value analyses) exceeds that amount, claiming the deduction gets more complicated.This valuation ceiling comes into play when a charity sells a donated vehicle. In this case, just how much a taxpayer can deduct depends on the amount the sale nets.
For example, you donate your old station wagon that's worth $1,000. Under the old rules, that would be the amount you could deduct. But now, if the charity turns around and sells your donation for $800, your deduction is limited to the lower sales price.
The charity must give you substantiation of the IRS-allowed donation amount within 30 days of when you turn your car over to the charity or, if the group sells the auto, within 30 days of the vehicle's sale.
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By now, you should have gotten word from the charity as to what it did with your old vehicle. If you haven't heard from the charity, give it a call and ask that it send, or resend, you the donation specifics.
Plus, you now must include a copy of the acknowledgment with your tax return. Previously, such receipts were generally only kept by the taxpayer in case the IRS questioned a claimed deduction.