Donating Cars To Charity - New Tax Rules
On June 3, 2005, the IRS released a guide on charitable deductions for donated vehicles. The American Jobs Creation Act (AJCA) radically changed the amount of the deduction taxpayers can now claim for their donated car.
Fair Market Value v. Actual Sales Price
When donating a car to charity, a taxpayer traditionally was allowed to deduct the fair market value. The new law changes this valuation to the actual sales price of the vehicle when sold by the charity. The taxpayer is also required to get written and timely acknowledgment from the charity in order to claim the deduction
The AJCA does provide some limited exceptions under which a donor may claim a fair market value deduction. If the charity makes a significant intervening use of a vehicle– for instance, the car is used regularly to deliver meals on wheels– the donor may then deduct the full fair market value. For example, driving a vehicle a total of 10,000 miles over a1 year period to deliver meals is a significant intervening use.
The AJCA also allows a donor to claim a fair market value deduction if the charity makes a material improvement to the vehicle. Under the new rules, a material improvement means major repairs that significantly increases the value of a vehicle, and not just painting or cleaning it.
Interestingly, the IRS has also added an exemption not included in the AJCA. On its own, the IRS has determined that taxpayers can claim a deduction for the fair market value of a donated vehicle if the charity gives or sells the vehicle at a significantly below-market price to a needy individual, as long as the transfer furthers the charitable purpose of helping a poor person in need of a means of transportation.
If you intend to use one of these exemptions, how do you determine the fair market value? Generally, by using vehicle pricing guidelines and publications that differentiate between trade-in, private-party, and dealer retail prices. The IRS considers the fair market value for vehicle donation purposes to be no higher than the private-party price.
The new provisions of the Americans Job Creation Act certainly makes it less attractive to donate a car to charity. If you do decide to use the exemptions, however, you can still create a sizeable deduction while helping others who are less fortunate than you.
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Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review.
2005 Car-Knowledge.com
