November 18, 2004 -- The American Jobs Creation Act of 2004 (AJC), which was signed on October 22, 2004 , has a significant impact on 2004 year-end planning.  A popular tax break–donating an old car to charity–will lose most of its appeal at the end of the year.  Vehicle donation has been a growing "industry" over the past few years and Congress is allowing the IRS to tighten the amounts of these donations that taxpayers can deduct.

The AJC Act now limits the deduction for automobiles donated to charity depending upon how the charity uses the vehicle.  Taxpayers who are considering making charitable contributions of vehicles, boats, or planes should strongly consider getting it done before 2004 ends as the new law takes effect on January 1, 2005 .

Under the rules that are effective until December 31, 2004 , taxpayers have been able to donate a car to a qualified car-donation program and were able to deduct the fair market value of the vehicle based on using an established used-car pricing guide (NADA Blue Book or Kelley’s Blue Book).

Beginning in 2005, the allowable deductions for charitable contributions of vehicles for which the claimed value exceeds $500 will depend on how the donated vehicle is used by the recipient charity.  If the organization sells the asset without any significant intervening use or material improvement, the donor’s deduction is limited to the gross proceeds received by the charity.  The actual fair market value of the donated asset is irrelevant.

The new law also requires increased donor reporting on the individual’s tax return.  A deduction of more than $500 will not be allowed if the individual does not include with their return, for the tax year of the contribution, a contemporaneous written acknowledgment from the charity. 

In short, the new legislations will limit the amount that taxpayers can deduct for donating vehicles to charities for which these contributions are ultimately benefiting.  Taxpayers who are considering making charitable donations of vehicles, boats, or planes should be advised to get it done before the end of this year.  That way, they can deduct the asset’s full fair market value, and the recipient charitable organization will only have to comply with current-law substantiation requirements.

For more information, contact an Asher tax professional at 215-564-1900 .

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