Beginning in 2005, Congress has imposed some tough new rules that will substantially limit the deduction for this popular charitable donation. Prior to this change, taxpayers were generally allowed to deduct the fair market value (FMV) of the vehicle.

It is common practice for charities to immediately resell the donated vehicles to a wholesaler at substantially reduced prices, generally far less than the FMV claimed as a deduction by the donating taxpayer. Under the law changes taking effect in 2005, if the deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle.

Example: A taxpayer donates a car with a FMV of $2,000 to a charity. The charity immediately sells the car to a wholesaler for $900. The taxpayer would only be able to deduct the gross proceeds from the charity’s sale. This limits the taxpayer’s charitable contribution deduction to $900.

In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS has developed new Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.

There is an exception to the new rules for donated vehicles which the charity retains for their own use “to substantially further the organization's regularly conducted activities” or sells it at a price significantly below FMV (or gives it away) to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. Please call this office for more information.