Tax Tip of the Week
For the week of December 20, 2004

There are new rules for donating vehicles to charity

If you donate a used vehicle to charity, you are allowed to take a tax deduction if you itemize deductions on your tax return. Be aware of the big change in the deduction rules, thanks to the recently signed American Jobs Creation Act of 2004.

Here's a look at the change that goes into effect January 1, 2005.

Old Law
Rule: You could estimate the fair market value of the donated vehicle and deduct that amount on your tax return.

The deduction was often determined by "blue book" value. Most of the time charities used agents to sell donated vehicles at auction, usually for far less than blue book value. Charities received a "contribution" far smaller than what the taxpayer took as a deduction.

New Law
Rule: The charity must inform the taxpayer of the price the donated vehicle sold for at auction. This is the amount the taxpayer can claim as a tax deduction. If the charity keeps the vehicle for its use, it must give the taxpayer an estimate of the value. This requirement applies when the claimed value of the vehicle exceeds $500.

For example, if a taxpayer gives a car with a blue book value of $3,000 to a charity, that value can no longer be used — even as a starting point — for determining the value of the vehicle and the amount of the deduction. If the charity sells the car for $575, that's the amount that can be taken as an itemized deduction.

The new rules are designed to close the gap between what the charity actually receives and what the taxpayer deducts.
  

"Tax Tips" are published weekly to provide useful tax information. Return to this site every week for helpful tax-cutting suggestions, tax reminders, and current tax information.

The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax-cutting information from time to time, please contact our office. We're here to help.