Monday, December 7, 2009

‘Tis the Season

It’s the Holiday Season already. I can tell because two annual-as-clockwork events have started occurring i.e. (1) Its finally raining in Southern California and (2) my mailbox is plugged with solicitations from charities. This time of year charities recognize the more generous holiday spirit of potential donors, as well as the looming December cutoff for tax deductible donations by the more tax aware amongst us. Either way, the radio and direct mail advertising ramps up exponentially. One area that our office sees a lot of misunderstanding about is donations of property, notably AUTOS.

For donations of property you are generally entitled to deduct the fair market value of property given to a qualified charity. So when you donate a car, boat, RV or whatever to charity, you are entitled to take as a tax deduction the value of that property. The way this worked in the past was you would contact one of those radio advertisers, they would come and pick up your car, and you would take a deduction, say a hypothetical $4900 (coincidentally not exceeding the $5,000 appraisal requirement) for the clunker towed out of your driveway. Assuming a combined tax bracket of 30%, that $4900 deduction would net you a tax reduction of around $1500. Taxpayers diligently documented the values of these cars by way of Kelley Blue Book, Edmunds or some other resource. They got a reduction in tax, the charity got cash, the company that picked up and sold the car took a commission, and everyone was happy.

Well, almost everyone. Unfortunately, IRS figured out that some of these values might be slightly overstated. Enter the new rules: Now, when certain assets (Cars, Trucks, Boats, RV’s) are donated to a charity and the charity sells them, the charity, or their agent, is required to disclose to the donor the proceeds from the sale. This will be your deduction. Since most of these assets are immediately disposed of via auction, it effectively limits your deduction to the rock bottom wholesale price. The only way around this is if the charity actually keeps the car, truck, or whatever and uses it in its exempt purpose.

So, when you hear the radio spots asking you to donate your car, before you call remember that the tax deduction will get you less than 1/3 of what you would realize if you were to sell that car yourself. If you sell the car you could still donate the wholesale amount to your favorite charity, get the same tax deduction, and pocket the difference!

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