Auction Articles

Looking for a Tax Deduction? What You Need to Know Before Do

By: ARA

(ARA) - How much of a deduction can you take on this year’s tax return for donating the clunker-of-a-car in your garage? Donor beware, there are a few things you need to know before giving your vehicle to charity.

Research the Charity

A recent report found that many charities across the United States misrepresented themselves or the amount of the donation that would be used for charitable purposes. According to a 2001 study, donors expect at least 70 to 80 percent of a charity’s funds to be used for charitable purposes rather than administrative costs; however many charities ended up with only 15 percent of the original donations made.

When a vehicle is donated to a charity, it is then sold at auction by the charity itself or a third party. In both cases, there are towing and administrative costs deducted from the final amount the charity receives.

One company, ADESA Impact, out of Indianapolis, is a wholesale auction company with a national vehicle donation division. ADESA Impact is under contract with many of the nation’s most recognized charities.

According to Joe Hearn, one of the company’s vice presidents, ADESA Impact is able to provide one of the highest rates of return to the charity because they have negotiated the lowest rates for transportation and sale of the vehicle while still pursuing the highest returns through its auctions.

Avoiding an Audit

The U.S. General Accounting Office (GAO) reviewed the average deduction claimed for donated vehicles in 2000 to determine whether the values fell within the ranges identified in the Blue Book and found that almost all of the vehicles did. However additional information regarding the vehicle’s condition was not available to determine exactly how appropriate the amount deducted was.

Kelley Blue Book, the recognized vehicle valuation and pricing guide, offers a free tool on their Web site called the Vehicle Condition Quiz. When determining the ‘Private Party’ value of your vehicle on their site, which is the value you’ll use for a vehicle donation, click on the ‘Rate It’ button when the site asks you to select a condition and then click ‘Get Pricing Report.’ You’ll be taken to a page where you can appraise your own vehicle through a 27-point appraisal. Fill out the appraisal form and print it. It includes items that will provide you and the IRS with the details the IRS needs. You may also want to take photos of your vehicle to prove its value and condition when filing with the IRS.

According to the GAO, the IRS has a compliance program which looks at how much taxpayers claim as the Fair Market Value for a vehicle vs. what the charity actually sold the vehicle for, making Kelley Blue Book’s Condition Quiz a valuable resource. While the IRS recognizes that there are differences between fair market value and wholesale prices at which vehicles are sold at auction, the difference will give them an indication of which filings may need to be scrutinized further. In fact 49,000 2001 tax year filings will be reviewed and could be subjected to audits.

Know what percentage of your vehicle donation is actually going to the charity, make sure the charity you are donating the vehicle to is a reputable one, and have a detailed vehicle appraisal from Kelley Blue Book’s Web site for the IRS.

Tips for Donating Your Vehicle

Recent donor studies show that the ability to claim a deduction on their taxes is the top reason most people donate a vehicle to charity. If you are considering donating a vehicle there are several things to be aware of:

1. ‘You’ must determine the value of your vehicle.

The IRS considers it a conflict of interest for the charity to determine the value of your vehicle. However vehicles worth more than $5,000 must be independently appraised. This appraisal must be completed before the charity picks up the vehicle.

2. You can deduct contributions only in the year you make them.

Keep in mind you must itemize your tax return to claim a tax deduction.

3. Get a receipt.

When you make any non-cash contributions, you must get and keep a receipt from the charitable organization showing the name of the charity, date and location of the charitable contribution, and a detailed description of the donation. This receipt also includes the charity's tax identification number. Keep this for your records.

4. Assign a fair market value to your vehicle.

Use Kelley Blue Book's Web site. The Condition Quiz is very detailed allowing you to input specific information about your vehicle's current condition to give you the Fair Market Value. Use the ‘Private Party’ value and the ‘Help Me’ links in the pricing report feature to get the most accurate value.

5. Make sure the charity is a name you recognize and trust.

The donor should be familiar with the charity's purpose. Be careful of 'sound-alike' charities, e.g. National Kidney Foundation vs. National Kidney Fund, American Heart Association vs. American Heart Society. You can also call the Better Business Bureau to determine if the charity you have chosen is a recognized organization.

6. Ask how much money the charity receives.

According to a report from the from the Office of California Attorney General, more than $34 million was donated in automobile revenue in 2000, however, only 32 percent of the gross revenue was returned to the charity.

7. Sign the title over directly to the charity or their agent.

Don't leave the title blank under any circumstances. Many illegitimate charities ask that the title be left blank. This practice may leave you liable for the vehicle months after it has been donated.

8. Ask how and where the money will be spent.

In light of the confusion surrounding the monies raised after September 11, donors should be sure to ask how the money is being utilized and inquire if the money is spent locally.

For more information on ADESA Impact charities, vehicle donation and tax forms required for donation, visit the Kelley Blue Book Web site at www.kbb.com and the IRS Web site at www.irs.gov.

Courtesy of ARA Content

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