Determine the Value of Donated Cars Carefully
The latest twist in the year-end bid for charitable contributions is your car--many charities are asking you to give it away.
In the past few months, charities ranging from the Jewish Education Fund to the American Red Cross have begun to advertise in newspapers and on radio, asking the philanthropically inclined to consider giving their used cars away. Not only do you help the charity, the appeals say, you also get a tax deduction for the fair market value of the automobile, without the unpleasant hassle of selling it.
Why ask for your car rather than cash?
“These are lean times and charities are seeking out new ways to get funds,” says Bennett M. Weiner, vice president in charge of the Philanthropic Advisory Service, a division of the Council of Better Business Bureaus in Arlington, Va.
“It’s a sign of the times,” adds a spokesman for the American Red Cross’ vehicle-donation program. “It used to be you would ask for money, and people would send $25. That doesn’t happen anymore. People are tough.”
Also, the charities note that people often dislike the process of arguing about the value of a trade-in with a new car dealer or taking up the role of a car salesperson themselves--especially if the car has some damage.
Yet, while it’s often smart to give away appreciated property, such as stocks and bonds that have risen in value, there is less value in giving away depreciated property, such as an automobile.
Here’s why: When you give appreciated property to charity, you get a tax deduction for the full market value of the property on the date that it’s given, and no one pays capital gains taxes on the increase in value.
For instance, let’s say you bought a share of stock for $100 in 1980 that’s now worth $1,000. If you sell the stock, you’ll owe capital gains taxes on $900--the difference between today’s value and the purchase price. And that can cost you $252 in capital gains taxes, at least under current law. But if you gave the stock to charity, you get the same $1,000 tax deduction as you would if you gave cash, saving $280 in income taxes if you’re in the 28% bracket. No one pays capital gains taxes on the $900 stock price appreciation.
If you were planning to get rid of the stock and give $1,000 to charity anyway, giving the stock rather than cash saves you the $252 capital gains tax. There’s no question about the value of the shares, because share prices are published both in the paper and on electronic retrieval services each day.
However, when you’re giving away property that declines in value over time--such as clothing, household items or automobiles--there are no capital gains to shelter. Therefore the value of your deduction is equal to the value of an equivalent cash contribution. In other words, giving away $1,000 worth of clothes gets you the same $280 tax deduction as giving away $1,000 in cash.
Moreover, you have to establish the value of the property you have given away. And since there is no national market or established price for used property, determining a price is a bit of a guessing game. But the IRS expects your guesses to be darn close to accurate--especially if you’re giving away many things, or items of great value.
When you give away personal property, including automobiles, that are worth more than $500, the IRS requires you to fill out a special form--called Form 8283--and attach it to your tax return. This form must contain information on the organization receiving the gift; a description of the property; the date it was given; the date it was acquired; the fair market value of the property and how you determined that value.
If the car’s value is $5,000 or more, you need to have an independent appraisal as well.
In the case of automobiles worth less than $5,000, most charities suggest that you use the value listed in the “Kelley Blue Book” for used cars. Some charities have even hinted or suggested that donors can pad the deduction by taking the highest figure in the Blue Book, even when the car is in poor condition. But since the donor, not the charity, is obligated to value the car, and since it is the donor who would suffer the tax liability and penalties if the IRS deemed the deduction inaccurate, givers would be foolish to take such glib tax advice, says Bernard Oster, partner at the Los Angeles law firm of Cohen Primiani & Foster. You take the risk, not the charity.
“I have heard at least three different ads over the last couple of months and some of the charities say they don’t even care if your car is operational,” Oster says. “If the car can’t even be driven, you’d have a hard time arguing that it was reasonable to deduct the ‘Blue Book’ value.”
Noncash charitable contributions have long been considered an audit trigger that can single your tax return out for greater IRS scrutiny, tax accountants say. So, not only do you have to carefully establish the value of your contribution, you have to document it--and keep your records.
Oster suggests not only copying the appropriate Blue Book page, but that you also take pictures of the car and keep classified advertisements that indicate that similar cars were selling for the price you claimed at the time you gave it away. In addition, if the car is very valuable, Oster says he’d even have a local mechanic check it out before the gift is made, to certify that the car is in pristine condition and worth every penny that you deducted.
“The burden is on the donor to assess the value of the car, and I would think the IRS would check something like this out quite carefully,” adds Daniel Borochoff, president of the American Institute of Philanthropy. “Keep good records.”
