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Congress Closes Car Donation Loophole

October 20, 2004

Car Donations • IRS Warns of Questionable Deductions for Donated Vehicles • Car Donation Free Ride Is Over • St. Louis Woman Gets Jail Term in Car Donation Scheme

That $4,500 tax deduction you've been counting on for donating Uncle Charley's rusted-out Dodge to a local charity? Sorry, that free ride is over. Congress has tightened the rules on charitation donations of cars, boats and airplanes as part of a tax bill passed earlier this week.

The government expects that clamping down on the donations will boost tax revenue by more than $250 million a year. If President Bush signs the measure as expected, it will take effect early next year.

Under the old rules, all it took was a receipt from the charity to claim a donation of less than $5,000. Donors determined the car's fair market value themselves, typically by consulting a used-car price guide such as the Kelley Blue Book, and making their own estimate of the car's condition.

Under the new rules, donors will have that kind of leeway only if the claimed value is $500 or less.

Starting Jan. 1, donors generally will be able to deduct only the price the charity gets when it sells the donated vehicle. Charities will have to notify donors of the amount of the sale within 30 days.

Most charities never even see the cars are donated. They typically contract with an auction service, which picks up the vehicle, auctions it and deducts its fee. The charity often winds up with less than $100 while taxpayers take deductions of several thousand dollars.

The General Accounting Office (GAO) tracked 54 vehicle donations made in 2000 and found that in two-thirds of the cases, charities received 5 percent or less of the value than the donors claimed on their tax returns.

The GAO estimates that 4,300 charities have vehicle donation programs, some of which bring in millions of dollars.

"The taxpayer can still donate his 1985 Pacer that goes only in reverse and the charity will get the same amount of money it always gets," said Sen. Chuck Grassley, R-Iowa, a leading sponsor the bill. "The only difference is the taxpayer can't claim $5,000 for the car that will sell at auction for $50."

There is an escape clause in the legislation: If a charity actually uses a donated vehicle in a "significant" way in its programs, the donor can take the market value of the car. However, Congress instructed the IRS to set strict guidelines on what is considered "significant" and set stiff financial penalties for charities that provide false information.

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