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| The Basics | No more free rides on car donations, SUVs
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If you want to get a fat tax break donating a used car to charity, do it now. Starting next year, the rules are severely tightened. And forget about buying that big ol' SUV for a big ol' tax deduction.
By Jeff Schnepper
Congress calls the new tax law the American Jobs Creation Act of 2004. I call it the Billion Dollar Special Interest Giveaway Act of 2004. If you were smart enough to hire a lobbyist, you got a tax break. But partially to pay for those special interest tax breaks, someone or something had to lose.
If you imagined your car as a possible tax shelter, you lose.
How your car became a tax shelter
In recent years, many charities have financed their activities by reselling donated cars and boats. Volunteers of America, a major charity, was getting more than 80,000 cars each year. Thats about to stop.
The basic rule has been simple. If you donate property youve held for more than one year to a charity, you get to deduct the fair market value of that property as an itemized charitable contribution. With cars, many taxpayers have used the Kelley Blue Book, the bible of used-car valuations, to come up with fair market value.
In all fairness, that figure may have little to do with the true market value of your car.
Lets use some real numbers. The sales from the 80,000 cars donated to the Volunteers of America generated about $10 million. Thats only $125 per car.
I checked out the Kelley Blue Book and couldnt find a lot of $125 cars. A 15-year-old Ford Escort was valued at 10 times that amount.
The differential between what Kelley thinks a used car is worth and what a used car is really worth in the marketplace allowed a lot of savvy taxpayers to play a game. Buy a clunker from a used car dealer; it doesnt even have to run. The clunker may only cost you $200, but it has a Kelley Blue Book value of $2,000. You hold it for a year, make the donation and take the Blue Book value as the deduction. In the 35% tax bracket, youve saved $700 in taxes. Thats a $500 profit on a $200 investment.
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Charities certainly didnt end up with the full dollar value of donations claimed on tax returns. Indeed, one government study reported that only 32% of the more than $34 million claimed in 2000 for cars donated to charities ended up in the charities pockets.
The scam charities
Valuation isnt the only problem. Almost 10 years ago, I donated a car to a Massachusetts charity that advertised in The Wall Street Journal. Six years later, I was visited by a detective from Massachusetts. The charity was being investigated as a scam. The cars were being sold, but the proceeds were going into the pockets of the promoters, not the charity.
Under the new law, effective for donations made after Dec. 31, 2004, the rules change. Really change.
Now the charity receiving the donated car (or boat) must tell you what it actually sold for. And youre limited to that amount, and that amount only, as a deduction. The free Kelley book ride is over.
What to do? Make that donation this year, before the new rules take effect. And, make sure the charity is legit. Call the Better Business Bureau or check out the charity with the IRS. Before I make a donation to a charity I dont know, I now ask to see the Form 990 that they file with the IRS. Legitimate charities will have no problem with the request.
Never leave your auto title blank. Put in the name of the charity. And, always get a receipt.
The good news? You get to deduct the full sales price -- not reduced by any selling costs. That's something, at least.
You and your huge SUV deduction
Charitable car donations werent the only place vehicles were slammed in the new law. That big fat SUV you thought you might write off in a year was also hit.
Normally, business cars are depreciated over a five-year period. If your business car is rated at 6,000 pounds unloaded gross weight or less, theres a limit on how much you can depreciate each year. With trucks, vans and SUVs (which are treated as trucks for this purpose) weighing 6,000 pounds or less, these limitations mean it can take you 10 to 15 years to fully depreciate an expensive vehicle.
But if your vehicle weighs more than 6,000 pounds (and many big SUVs do) these limitations dont apply -- or rather, they didnt. The 2003 tax law increased the amount of business property that you can elect to annually expense from $25,000 to $100,000.
Under the current rules, savvy business people bought luxury SUVs that weighed over 6,000 pounds for $70,000 to $80,000 and wrote off 100% of their cost in a single year (assuming 100% business use). If someone used an $80,000 SUV 90% for business, the result is a $72,000, single-year deduction. That saved someone in the top 35% bracket $25,200 in tax. Not a bad deal!
But that big fat SUV tax break is going away.
Now, for SUVs weighing between 6,000 and 14,000 pounds, the annual expensing limit has been cut from $100,000 to $25,000. So, it may take four years or more to write off the vehicle. Its still not a bad deal. But it's not as sweet as before.
This one is effective for vehicles put in service after Oct. 22, 2004 -- the date of enactment of the law. So, maybe that huge SUV isnt such a deal after all.
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