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.
