On October 22, 2004 President Bush signed the American Jobs Creation bill (HR 4520) into law. Section 731 of this law places new restrictions on car donations to charity. If you are planning to donate a car, it is important to note these changes to the tax law that went into effect on January 1st, 2005 to make sure that you will receive the tax benefits that you expect from your car donation.

Title VIII: Revenue Provisions – (Sec. 884):

Title VIII revises rules for claiming tax deductions for charitable donations of motor vehicles, boats, and airplanes valued over $500, limiting the allowable amount of such deductions to the gross proceeds received by the charitable organization from the sale of the donated vehicle. It requires the organization to provide donors with a written acknowledgment of the contribution within 30 days of the donation and imposes a penalty upon charitable organizations for providing false or fraudulent acknowledgments.

News on tougher car donation tax laws for 2005:

To help reduce overvalued auto donations (and bring more tax dollars to federal coffers), the IRS has issued a new guide for auto donations. In addition, legislation signed into law by President Bush on Oct. 22 makes substantial changes to used-car charitable deductions next year. Beginning Jan. 1, 2005, when a taxpayer donates a vehicle for which the claimed value is $500 or more, the precise deduction he can claim will depend on how the charity plans to use the vehicle. If the auto is sold by the nonprofit, then the taxpayer will be able to deduct only the amount of gross proceeds the organization got from the sale. And the donor will have to depend on the charity to let him know the donation amount by the individual tax-filing deadline.

If, however, the group plans to use the car for what the law deems as “significant” tax-approved charitable work, the donor would be able to claim the fair market value of the donated vehicle. The new law also provides penalties for fraudulent acknowledgments provided to taxpayers. In a letter sent to the Treasury Secretary during consideration of the changes, representatives of two dozen charitable groups argued that, “Under such a proposal, a taxpayer’s actual deduction amount would be uncertain at the time of a contribution, and potential donors would not be able to compare the relative benefits obtained by donating their vehicles, trading them in to a car dealer, or selling the vehicles themselves. We believe this approach would greatly discourage and reduce future vehicle donations to charities and increase the cost of administering such programs, and we would respectfully ask that the Treasury join us in opposing any such proposal.”

Details on the implementation and enforcement of the new car donation law will be developed by the U.S. Treasury in the coming months, and lawmakers and charities will be watching closely.