Car Insurance

On June 3, 2005, the IRS released guidance on charitable
deductions for donated vehicles. The American Jobs Creation Act
(AJCA) radically changed the amount of the deduction taxpayers
can 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–such as regular use to
deliver meals on wheels– the donor may deduct the full fair
market value. For example, driving a vehicle a total of 10,000
miles over a one-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 guidance, a material improvement means major
repairs that significantly increase the value of a vehicle, and
not mere painting or cleaning.

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 assert one of these exemptions, how do you
determine the fair market value? Generally, vehicle pricing
guidelines and publications differentiate between trade-in,
private-party, and dealer retail prices. The IRS consider 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
make it less attractive to donate a car to charity. Using the
exemptions, however, you can still create a sizeable deduction
while helping others who are less fortunate.