Donating your car is a charitable act, but you cannot use it as a deduction unless properly documenting your donation in your taxpayer return. The charity does even not need to sell your donated vehicle in 2005 for you to deduct your charitable contribution, according to the Internal Revenue Service (IRS). But, like other things in life, some things are not done until the paperwork is completed.
The American Jobs Creation Act of 2004 specifies that your deduction is limited to the gross proceeds of the sale of the vehicle to the charity. You can only take a charitable contribution deduction in the tax year that the vehicle was transferred to the charity and the vehicle can be sold in a following year. The charity must provide a written acknowledgement of the gross sales proceeds within 30 days after the sale of the vehicle.
Since the passing of the American Jobs Creation Act of 2004, charities have seen the donation of vehicles to charities fall between 20 and 40 percent, nationwide, for major charities and up to 50 percent for local charities, according to USA Today. The law has meant an increase in paperwork for the charities. âIt's tripled our paperwork, because we have to follow the car all the way through to the sale,â said Jim Hartman of Volunteers of America (VOA). VOA expects 48,000 vehicles to be donated in 2005, but has seen as many as 80,000 in previous years.
Only those who can itemize their deductions can take a charitable contribution deduction. Your charitable contribution deduction is limited to $500, or less, until the charity provides a written acknowledgement of the donated vehicle's gross sales proceeds. The acknowledgement must be attached to your return.
If the acknowledgement is received after you have filed your return for the tax year you transferred your vehicle to the charity, you are allowed to file an amended return so you can claim the full charitable contribution deduction if its over $500. The acknowledgement must be attached to your return. If the charity keeps and uses the donated vehicle for its operations, the fair market value can be deducted, according to USA Today.
The IRS has noted that some charities have sold donated vehicles at auction claiming that the sale went to needy individuals at prices below fair market value. Donated vehicles sold by charities at auction classified as sales to needy individuals will not qualify for this exception. The position of the IRS is that vehicles sold at auction are not sold at prices significantly below fair market value. USA Today reports that cars valued at $1,500, by taxpayers usually sell at auction for about $350, according to the Government Accountability Office.
Ensuring that the charity is a ârecognizedâ charity is important. Check out the charity to which you are donating your vehicle, as some charities that promote vehicle donation do not meet the proper criteria. The Better Business Bureau (BBB) may be a good place to start, according to the St. Louis Post-Dispatch. They report on charities, using 20 standards for charity accountability, for which 70 percent meet all of its accountability standards, according to the BBB. You can get more information on the BBB and their charity accountability standards at http://www.bbb.com.
The IRS advises that fair market value is not determined by the Kelley Blue Book value. The car's value should be determined on accessories, mileage, and overall condition instead. Review IRS Publication 526, Charitable Donations and Publication 561, Determining the Value of Donated Property for additional information.