| Who can I
donate my car to? What does "maximum allowed by law" mean? What other limits are there? Are there any other limits or traps I need to watch out for? How about paperwork?
NEW LAW -
2004 |
I’ve been bombarded recently by radio and newspaper ads suggesting that I donate my old car to a variety of charities. It occurred to me that there is a lot of misleading information in that headline that says "deduction to the maximum allowed by law." Lets look at this from the standpoint of common issues in a
question and answer format. Additional answers can be found Q) Who can I donate my car to, to get a tax deduction? A) The tax law allows you to deduct the fair market value of any non-cash property that you donate to certain qualified charitable organizations. Not every "non-profit" organization is eligible. Likewise, not every tax-exempt organization is allowed to receive donations that are tax deductible. At a technical level, organizations must be qualified under specific provisions of the Internal Revenue Code; section 501(c)(3) and section 170(c). Basically schools, churches and public charities like Salvation Army, Goodwill, Scouting, the Red Cross and other similar organizations qualify. The actual list of qualified organizations is quite large. [visit the IRS website to lookup qualified organizations by name] If you use this feature, you’ll need to use your browser’s BACK button to return to this site. Q) What does "maximum allowed by law" mean? A) An organization that receives your donated car has no idea what the tax savings will be to you individually from the donation. There is an obstacle course of rules and limits, and some of these can apply differently to different individual taxpayers. The first rule, or limit is the amount of the donation. When non-cash property is donated, the donation is valued at "fair market value." The fair market value of an item is the sales price that would be agreed between a willing buyer and a willing seller, neither of whom is under a compulsion to buy or sell, and each has full knowledge of the market as a whole and generally available information about the particular property. Determining this value is both an art and a science – that’s why appraisers have jobs. "Blue Book" is one indication of common market values; it is by no means an authoritative determinant of the value of the car you donate. The amount of the donation you can claim is the full retail price you could realistically and reasonably obtain in an arms length sale of the exact vehicle you’re donating in its current condition at the time donated. If the car does not run, has high mileage or serious defects its true fair market value will be [substantially] below "blue book." It’s the responsibility of the donor (you) and not the recipient organization to establish the value of the donated property. Do not expect the charity to tell you what the car is worth – they might, but YOU remain responsible for it’s accuracy and use on your tax return. However, see below where an appraisal may be required to be included with your tax return for certain donations valued over $5,000; and recent law changes beginning with the 2004 tax year will also affect this. Q) What other limits are there? A) First, to get a tax deduction at all, you must end up itemizing your deductions on your tax return using Schedule A. The total of your itemized deductions (including this contribution amount) must exceed the standard deduction available before you’d receive any tax break for the deduction, and then only to the extent of the difference. For example: If you’re married, your adjusted gross income is $50,000, your home is paid for and your itemized deductions otherwise total about $4,000; the only tax break you’d get is to the extent that the value of the car donated exceeded about $3,100. If the car was valued at $4,000 you’d save the taxes on $900 of extra deduction or approximately $250 in tax. In this same example, if your itemized deductions were already $10,000 before donating the car, all of the car’s value would be additional deduction, saving you over $1,000 in tax. Same car, same organization, same donation, same value of the charitable contribution -- markedly different tax savings. Q) Are there any other limits or traps I need to watch out for? A) Possibly. Another limit that rarely affects people is the total annual limit on charitable contributions. In any given year you cannot deduct more than 50% of your adjusted gross income in charitable contributions (and for contributions to some organizations and for some property this limit might change to either 30% or 20%). The application of these limits are complicated but if the donation is particularly high, or your adjusted gross income is particularly low, this limit could affect you. Any contribution that exceeds this limit is carried forward and is available for use over the next five (5) tax years. Q) What about the recent law change in this area? A) Beginning with the 2004 tax year, Congress decided to crack down on a deduction area it felt was full of abuse, and in many cases the abuse was rampant. That 1982 Mercury Marquis with 198,000 miles, no spots without rust holes, and no engine was just not worth $4,999. (an extreme example). Beginning with the 2004 tax year, charities must report back to donors on the use or disposition of the donated car. When the charity sells the car, your donation is limited to the proceeds of the sale (true fair market value). Q) How about paperwork – there’s got to be lots of paperwork? A) Government + Taxes = Paperwork. But its not too bad. Whenever the total amount of your non-cash deductible charitable contributions exceed $500 you must complete and include Form 8283 with your tax return. Whenever you donate any item or group of similar items that are valued over $5,000 you must secure an appraisal on those items. The reverse of Form 8283 has a place for you to secure the appraiser’s certification. If you claim a value of $5,000 or more on your car, you’ll need to get it appraised, and complete the reverse of Form 8283. Many car dealers will give you the appraisal you need and even sign the form if you don’t force them to lie about the amount. Also, any individual contribution greater than $250 must be reflected in a written acknowledgement from the charity secured before filing the tax return (you can’t go back and get it when you’re audited) Not having the written acknowledgement is grounds for disallowance of the charitable contribution even when you can prove the contribution through other means (like the title transfer documents, or a cancelled check) As it turns out, the reverse of Form 8283 also contains an section where the charity can acknowledge receipt of the donation. Q) Sounds like this is just a hassle and a bad idea all around. A)
Quite the contrary. In fact recently I personally donated a van
which I had appraised at $4,700 to a charity. Clearly there are many,
many reasons why you’d want to donate your old car to charity.
Making a significant donation to the particular charity
without killing your checkbook is one of the big ones. Not wanting to
go through the hassle it would take to actually FIND a buyer at the
real retail value of the car is another. Just be prepared to ensure
that you actually get and are able to sustain the tax deduction you
deserve; and don’t expect that your old 1972 Chevy Pickup without an engine and rusted throughout will save you
thousands in tax; no matter what the people on the radio tell you!
RS
Publication 526: "Charitable Contributions"
IRS Publication 561:
"Determining the Value of Donated Property" For an in-depth individual consultation contact: Financial Tax Management Network The above discussion summarizes
complex aspects of tax law. Tax laws change. Your individual
circumstances may result in a tax treatment which differs from the above summary. Contact
your tax advisor before entering into any transaction to ensure that the structure
of the transaction provides the expected tax benefits. These summaries do not consider any
individual or special circumstances. While the information is believed to be accurate at
the time of publication, Young, Heck & Zimbler, LLC, its officers or employees
make no guarantee or warranty, express or implied as to the accuracy of the information
presented and accept no responsibility for errors or omissions in the above nor for any
damages, direct or consequential arising from reliance on the information contained
herein.
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