June 12, 2008 | Read Time: 2 minutes
A new government report shows that a federal law designed to stop donors from inflating the value of gifts of used cars has had a big effect.
In 2005 — the year the law took effect — the number of automobile donations declined 67 percent from the previous year, from about 900,000 in 2004 to 297,000 in 2005.
The Internal Revenue Service said the amount of money that donors claimed in charitable deductions for these gifts dropped by more than 80 percent between the two years, from $2.4-billion in 2004 to $470-million in 2005.
Before January 1, 2005, donors could claim a tax break equal to the fair market value of a donated vehicle. After that, donors could generally deduct only the amount for which the charity later sold the vehicle.
Congress changed the law for donations of cars because the government found examples of large discrepancies between the market value claimed by donors and the actual sale price.
The current law has three exceptions. A donor may continue to deduct the fair market value of a vehicle if the charity uses the vehicle before selling it, fixes it up before selling it, or gives it (or sells it at a cut rate) to a needy individual.
The IRS report noted that its new statistics may overstate the overall effect of the change in law because donors of cars with little value do not report such gifts on tax returns and the IRS thus cannot count them.
Over all, Americans reported donations of $41.1-billion in noncash gifts in 2005, the IRS said, counting only the taxpayers who took total deductions of more than $500 for such gifts during the year. The $41.1-billion figure is an increase of 10.4 percent over the total of $37.2-billion in noncash gifts reported in 2004, even though the number of donors each year was about 6.6 million.
The biggest share of noncash contributions was made up of corporate stock, clothing, and household items.
The IRS report is available on the tax agency’s Web site.
