US Tax Rules – Donating Your Automobile For A Tax Deduction
by Steven B Jackson
I am sure that in recent years you have seen advertisements for donating your used auto and deducting it on your income tax. The very first thing you need to know when considering this is that you will need to be able to itemize. The amount you need to itemize is dependent on what filing status you use. To itemize, you will need enough allowable deductions that will total more than your standard deduction.
Donating autos to charity proves beneficial to three groups. In recent years taxpayers have over inflated valuations, and by doing so they have benefited from large tax deductions. The charity would benefit because they would then sell the auto, and for profit entities would benefit because they would charge the charity organizations to sell the autos for them. As you can see, the real loser in this was the United States Treasury, and the US government didn’t like this at all.
So now we have a new law. The American Jobs Creation Act of 2004 was enacted to tighten the rules for donating used autos, boats and airplanes. The new rule requires that two tests be met if the vehicle contributed, and the claimed deduction exceeds $500.
1)The charity substantiates the contribution by reporting to the taxpayer in a “contemporaneous written acknowledgement,” which the taxpayer must include with his or her return.
2)In general, the amount of the deduction cannot exceed the gross proceeds received from the sale. However, this limitation does not apply if the charity either materially improves the vehicle before sale or has a significant intervening use of the vehicle.
A “contemporaneous written acknowledgement” is one that is provided by the donee charity within 30 days of either one of the following; the sale of the vehicle or a certification that the vehicle has either been materially improved or that the charity has made significant intervening use of it.
Included in this statement must be the taxpayer ID number and the vehicle ID number. If the vehicle has been sold, the acknowledgement needs to also contain a certification that the vehicle has been sold in an arms length transaction between to unrelated parties, the amount of the gross proceeds from the sale, and a statement that the deductible amount cannot exceed the gross proceeds.
If the vehicle has been materially improved or if the charity has made significant intervening use of it, the acknowledgement must contain a certification of the intended use or material improvement of the vehicle and the intended duration of such use and a certification that the vehicle will not be transferred in exchange for money, services, or property before completion of the use or improvements
If a vehicle is worth more than $250 but not more than $500, then an acknowledgment needs to have the following information;
1) The amount of cash and a description (but not value) of any property other than cash contributed
2) Whether the donee organization provided any goods or services in consideration, in whole or in part, for the cash or property contributed
3) A description and good faith estimate of the value of any goods or services provided by the donee organization in consideration for the contribution, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect
If the sales price is $500 or less, the notice provides that the deduction is the lesser of the fair market value on the date of contribution or $500.
So you want to donate, what is a reasonable method to determine market value? I would say that if you refer to an established used vehicle pricing guide is a reasonable method of determining fair market value. With respect to used car guides, the IRS states that regulations establish two rules
1) Dealer retail value is not an acceptable measure of fair market value
2) For contributions after June 3, 2005, an amount not in excess of the price listed for a private party sale of a similar vehicle is an acceptable measure of fair market value
The IRS and the Treasury will also consider other values (i.e., dealer trade-in value). However, any regulations that might reduce the allowable fair market value below private party sale will not apply prior to the effective date of the regulations.
The new valuation rules do not supersede rules for contributions in excess of $5,000 where the deduction is not limited to gross proceeds from the sale of the vehicle. Such instances occur when the charity:
1) Materially improves the vehicle before sales,
2) Has a significant intervening use of the vehicle,
3) Sells to a needy individual at a price substantially less than fair market value, or
4) Makes a donation to a needy individual in furtherance of the charitable
purpose of the organization
In that event, fair market value is used and, since the contribution is in excess of $5,000, a “qualified appraisal” is necessary. A “qualified appraisal” is an appraisal document that
1) Pertains to an appraisal made not earlier than 60 days prior to the date of contribution
2) Is prepared, dated, and signed, by a qualified appraiser
3) Includes the required information
4) Does not involve an appraisal fee that is prohibited
This article is intended to be informational and I would suggest you contact your individual tax advisor for additional information as it relates to your personal tax situation.
Steve Jackson is a professional income tax preparer with over twenty years experience, helping clients with their individual tax situations. Steve offers tax services and if you file online, he can be here to help you with your tax situation, and will provide you with free updates during the year.
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