- The Washington Times - Monday, November 8, 2004

Anyone wanting to claim a tax deduction for donating a car to charity should do it before the New Year, tax analysts say.

Beginning Jan. 1, a law takes effect that will make it difficult for taxpayers to claim even the market value of their donated vehicles as a deduction.

The new law “reins in the ability of taxpayers to overinflate their deductions for charitable car donations,” said Jill Gerber, spokeswoman for Sen. Charles E. Grassley, the Iowa Republican who sponsored the legislation.

Currently, donors can deduct the fair-market value of their cars, even if the charitable organizations that receive them sell the vehicles for a lower price.

Most charities hire brokers to sell the cars at auctions or to junkyards. The brokers take their fee and the charities get the rest of the sale price.

Congress decided to change the law after a Government Accountability Office report showed that taxpayers commonly overvalued their donations.

Car donors have claimed $654 million in tax deductions, according to a GAO report last year. More than 4,000 charities benefited.

The problem was that the donors often benefited more than the charities.

Donors could set the fair-market value of their vehicles if they were worth less than $5,000. The charities only need to provide documents to the donors verifying they had received the vehicles.

“The way it was set up and being administered, it allowed people to take large deductions,” said Norman Rabkin, a GAO managing director.

Under the new law, deductions can be no more than the sale price of the donated car.

“That means that in a lot of cases, the fair-market value might have been higher,” said Sandra Raiter, an analyst for Virginia Beach-based Liberty Tax Service.

A donated car worth $2,500 that is sold by a charity for $400, for example, would allow the donor no more than a $400 deduction. Currently, they could claim a $2,500 deduction. There has been little the government could do if they claimed an even larger deduction.

Under the new law, charities that sell the vehicles must give donors written notice of the sale price within 30 days if the vehicles sell for $500 or more.

The only way a donor could deduct the fair-market value is if the charity keeps the vehicle for its own use.

An example could be charities that use donated cars to deliver meals to sick or elderly persons who cannot leave their homes.

“You need to know when you donate the vehicle what they’re going to do with the vehicle,” Mrs. Raiter said.

The American Red Cross, which frequently earns money by selling donated cars, advises donors to consult with a tax analyst before making donations affected by the new law.

“It is too early to determine if this new law will adversely affect car donations,” said David Bowman, American Red Cross assistant general counsel. “We expect to have a better grasp on its impact in six months.”

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