If you were thinking about donating your old car to charity, you better do so quick, and in 2004, because on January 1, 2005, Congress (in the American Jobs Creation Act of 2004) and the IRS will begin discriminating against those who would donate vehicles, boats and planes to charities.  Historically, when someone donates property to their favorite charity they may deduct its fair market value.  The common definition of fair market value is what a willing buyer will pay a willing seller.  When we donate a car (or boat) to a charity, they typically will sell it to a whole seller at an auction or for a bargain sale, who in turn sells it to a used car lot, who in turn sells it to the end user.  Although the whole seller is a willing buyer, the charity is not a willing seller.  The willing seller and buyer tests, establishing the fair market value, are not satisfied until the used car company sells it to the end user.  For example, a car worth $5,000 donated to a charity might be sold by the charity to the whole seller for $3,000, who might sell it for $4,000 to the used car company, who then sells it for $5,000 to the end user, which establishes the fair market value of the car.  Since the contributor could not likely ever know the details of the final sale, estimations of this value have historically been estimated by either consulting a used car value guide, such as Kelly Blue Book, or for assets over $5000, hiring an appraiser.  Beginning January 1, 2005, no longer.  In the example above, under the old rules the charitable contribution deduction is $5,000, next year the contribution would be only $3,000.

In order to close a perceived abuse of taxpayers by Congress, claiming higher values than reasonable, we can only deduct the amount charity is able to sell the car for, assuming that they actually sell it.  All other property given to charity such as clothes, toys and furniture can still be valued at fair market value.  Therein is the discrimination.  The IRS in IR-2004-142 has spelled out many of the details of the new law.  I have included it below.

Tom Umstattd, CPA

IRS Officials Urge Care for Those Making a Car Donation; New Law Changes Rules at End of the Year

IR-2004-142, Nov. 30, 2004

WASHINGTON — The Internal Revenue Service issued a consumer alert today to help taxpayers avoid potential pitfalls when they donate their automobiles to charities.

In addition, as taxpayers plan their charitable giving, donors should understand the way that the American Jobs Creation Act of 2004 will alter the rules for the contribution of used motor vehicles, boats and planes after Dec. 31, 2004.

Next year, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.

Under the new rules, the charitable organization must provide an acknowledgement to the donor within 30 days of the sale stating the amount of gross proceeds. Alternatively, if the charity significantly uses or materially improves the vehicles, the charity must certify this intended use and duration and provide an acknowledgement to the donor within 30 days of the contribution. If the charity significantly uses or materially improves the vehicle, generally, the donor may deduct the vehicle’s market value.

For the remainder of 2004, however, the new rules do not apply. Under the rules in effect for 2004, taxpayers will be able to deduct the fair market value of the contributed property.

“Just because the rules will be tightened for vehicles donated next year doesn’t mean anyone should give a car to charity and claim an inflated value this year,” said IRS Commissioner Mark W. Everson.

IRS officials recommend that people who want to donate their vehicle by Dec. 31, 2004, take the following steps:

*  Check That the Organization is Qualified — Taxpayers should make certain that they contribute their car to an eligible organization; otherwise, their donation will not be tax deductible. Taxpayers can use the IRS Web site to check that an organization is qualified by searching Publication 78. Publication 78 is an annual, cumulative list of most organizations that are qualified to receive deductible contributions. Publication 78 is also available in many public libraries. In addition, taxpayers can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Be sure to have the organization’s correct name and its headquarters location, if possible. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified. They frequently are not listed in Publication 78. Donations to these institutions are tax deductible.

*  Itemize in Order to Benefit — Many taxpayers can’t take a deduction for car donations because they don’t itemize deductions on their personal tax return. For taxpayers, the decision to itemize is determined by whether their total itemized deductions are greater than the standard deduction (for 2004, the standard deduction will be $4,850 for single; $9,700 for married filing jointly). Slightly more than one-third of the 130 million individual taxpayers itemized in 2001, the last year for which complete data is available.

*  Calculate the Fair Market Value — The donor must take many factors into consideration to establish the value of the car. Many used-car buying guides contain step-by-step instructions so that readers can make adjustments to the value of a car for accessories, mileage and other indicators of its general condition. Both Publication 526, Charitable Deductions, and Publication 561, “Determining the Value of Donated Property,” provide detailed instructions.

*  Deduct Only the Car’s Fair Market Value — Some car donation program operators have mistakenly claimed that donors can deduct the highest value listed in a used-car buyer’s guide for their make and model of car, regardless of the donated car’s condition. The IRS, however, will only allow a deduction for the fair market value of the car. Fair market value takes into account many factors, including the vehicle’s condition. The fair market value of the taxpayer’s car may be substantially different than the highest value listed in a used-car buyer’s guide for that make and model of car.

*  Document the Charitable Contribution Deduction — For vehicle donations, taxpayers must document the car donation and its fair market value. Recordkeeping requirements are comprehensive and vary depending on the amount of the contribution and the total amount of the charitable deduction. IRS Publication 526 details requirements for the types of receipts taxpayers must obtain and the forms they must file.

*  Contact State Charity and IRS Officials When in Doubt — Donors with questions about whether a contribution is deductible should call the IRS at 1-800-829-1040 or for TTY/TDD help, call 1-800-829-4059. They can also find IRS forms and publications at IRS.gov. Donors concerned that contributions are being solicited for fraudulent purposes should contact the appropriate state charity official, who is often located in the state attorney general’s office. A list of state charity official offices can be found online.

Related Items:

*  IRS Publication 78
*  State Charity Officials
*  State Attorneys General
*  Publication 526, Charitable Deductions (PDF 177K)
*  Publication 561, Determining the Value of Donated Property ( PDF 101K)

One man’s junk is another man’s treasure.  There are many folks less blessed than we and would greatly appreciate the stuff in our garages & attics.  Or perhaps we have moved, lost or gained weight or lost a beloved family member and still have some of  their personal effects that no one else in our family wants.  There are countless charities that receive gifts of personal property:  boats, cars, clothing, appliances, shoes, toys, household furnishings, you name it, even real estate.  Ginger and I have given to the Salvation Army, various churches, private schools, public schools, municipalities, neighborhood organizations, worthy Christian ministries, the Boy Scouts of America, Salvation Army, and others.  I personally prefer the Salvation Army due to their Christian ideals, rather than Goodwill.  Consult their Valuation Guide for Items Donated to the Salvation Army schedule which lists the average prices charged in their thrift stores.  A problem is, when we collect our “junk” we tend to just leave it off at the Salvation Army and do not get with a receipt, not itemize what we gave, and forget all about it at tax time.

It is amazing to me, after 24 years of experience, how many under report their charitable contributions.  I usually hear, “I don’t want to get the IRS mad at me,” like the IRS has emotions?!  There are 2 emotions inappropriate for making investment decisions:  fear and greed; same with determining fair market values.  So, what are things worth?  As usual, when taking an income tax position, there are some objective criteria to follow, and lots of subjective.  Objective criteria are:  using published (e.g. Wall Street Journal) trading ranges for common stocks donated, hiring a qualified appraiser for items valued over $5000, or donating the ownership of, for example, real estate, moments before the sale to an unrelated party, then using that sales price as the fair market value.  As president, Bill Clinton, setting an example for the rest of us by making public his tax return showing his deduction of $2 per pair of used underwear.  However, it is usually not reasonable to hire the expensive, and often over-worked qualified appraisers.  When this is the case, we must rely on the ambiguous, subjective and exciting measurement criteria offered to us by common law:  the gray area, my favorite color!

Tom’s Top Ten Tips for this type of giving:

1. Treat out of pocket charitable expenses for volunteer work, car miles, or amounts you paid for by check or credit card as cash expenses.  They are cash charitable contributions.  No guess work here, they are worth what you paid for them.
2. Know the locations of charities, so when you happen to drive by, you can easily drop off your items.  Sometimes charities like Texas Paralyzed Veterans can pick up your items from your front porch.  Always get and keep a receipt.
3. Amass less than $500 worth each time, then you do not need to keep track of the date you acquired the property, how you acquired the property, and the cost of the property.  Very important:  write down and itemize the property and number of the items given on a separate piece of paper, or on the receipt from the charity.
4. When the gift is made, write down in detail, using lots of adjectives, what the items are, and the cost(s) especially if over $500.  Instead of “radio” write down e.g. “AM/FM portable, stereo, Lafayette model 76XL, with dual 3 1/2 inch compatible speakers, condition: good.”  I frequently have one of my helpful children fill this page out; it gives them a sense of philanthropy; the IRS will not count off for misspellings.  Put this page and charitable receipt in your current year’s “Income Tax File Folder.”
5. On the day given, do not write down the value.  Psychologically, these items are worth the absolute least to you on the day you give them away.  (If they were worth a lot to you, you would likely not yet give them away.  Also you may be embarrassed that you still have them, bought them in the first place, or, how many pairs of shoes can a woman own. anyway!)  And do not value what they are worth to you, value them at what they are worth to someone else who is a “willing, knowledgeable buyer” and desires them.  Write values down much later, perhaps when you compile your data for me to prepare your return.  You would be surprised at how much some things cost in a thrift shop!  Stop in and see, sometime.  Exception:  when giving away large dollar items:  laptops, equipment, cars, etc., right before you give them away, look to see what they have sold on eBay recently.  Click the link below, then type in your item under “basic search” and click “search:”  http://search-completed.ebay.com/search/search.dll?GetResult&query=completed+items&ht=1&combine=y&SortProperty=MetaEndSort Then print out the comparable sale or “completed item,” as eBay calls it, and put this with your charitable receipt.
6. First see my article:  Discrimination Against Car Donators, concerning the new law for 2005 donations of vehicles, boats and planes to charities.  Big dollar items such as cars and boats, if valued less than $5000, currently do not need an appraisal, only the date contributed, acquired, how acquired (e.g. by purchase, gift), your cost and fair market value.  Traditionally Kelly Blue Book has been a good source of determining fair market value:  www.kellybluebook.com, but in January 2004, the Bush administration submitted more restrictions on the deductibility of vehicles to Congress.  http://www.usatoday.com/money/perfi/taxes/2004-01-16-mym_x.htm quotes:  “Conrad Teitell, a tax lawyer at the Stamford, Conn., firm of Cummings & Lockwood, says official ambiguity about the legitimacy of blue book values puts the taxpayer “in a very hard position.” Nonetheless, he says, deducting something close to blue book value for a working vehicle under the $5,000 appraisal threshold is probably defensible.”  Otherwise, for vehicles valued over $5,000, getting and attaching an appraisal to your tax return is greatly advisable, especially for 2003 returns.
7. Do not wait for that “great American spring cleaning.”  It is stressful and seldom happens.  Give frequently in small quantities.  Spring cleaning may work well in the Midwest, but the weather here in Texas allows for cleaning year round.  Have a collection box in your trunk ready.  I like those free blue recycle boxes that you can get from any Austin Fire Department station.
8. If you do have a considerable amount of items to give (e.g. spring cleaning, a death of a family member, etc.), consider separating it into groups of about $500 value each, and give them on separate days, contribute them to your partnership, and have the partnership give it.  Give some in the name of a family member in a higher tax bracket than you (you give it to them, and they give it to the charity) .
9. Gifts of appreciated property, held more than 1 year, will give you a charitable contribution at their fair market value, and you will not have to pay any capital gains tax.  Contributing publicly traded marketable securities, such as stock, is extremely easy.  Simply call your stock broker, have him or her open a separate brokerage account with the name and federal ID# of your favored charity, then simply direct your broker to make the stock transfer.  I have had many clients contribute stocks worth $1000s which they bought, inherited, received from their employer, etc. for very little, get the full deduction, and pay no capital gains tax.   If you give property (not including publicly traded securities) worth more than $5,000, you will need to get an appraisal, and have the appraiser sign Form 8283, Section B, which is filed with your tax return.  If you donate art worth $20,000 or more, you will need to attach a complete signed appraisal.  Real estate that you have trouble selling, and whose property taxes are high make good candidates for gifts.  If you are getting ready to sell appreciated real estate, you can have the title company change the deed just before closing, for an undivided interest (e.g. 10%) in the real estate  to your favored charity, then you and the charity together sell the property to the seller.  Make sure you talk to the seller first, and explain what you are doing!  Old buildings (without the land under them), especially in rural areas, like barns or old farmhouses, that may need to be torn down, make great gifts to the local fire department.  They typically will set it on fire, and practice putting it out, for training purposes.  When they are done with it, they usually have destroyed it for you.  Sometimes they will even haul it off for you as well.
10. Your charities need to be incorporated, and Section 501(c) organizations.  Certain Canadian, Mexican, and Israeli organizations also qualify as deductible if you also have taxable income from that country.  If the charity has a written statement saying that they are a IRC Section 501(c)(3) organization, or words to that effect, that should be sufficient.  Do not ask or expect your favored charity to tell you how much your donated items are worth.  Do not embarrass them with this inappropriate request.  They are a  religious, philanthropic educational organization, etc., not in the appraisal business.  Just simply ask for a written acknowledgement and description of your contribution, signed and appropriately dated.  My Southern grandmother called this a “thank you letter.”  If the item, or group of similar items, such as a silver service, collection of books, etc. is worth more than $5,000, then the charity will need to sign Part IV of your Form 8283 which you will need to attach to your Form 1040.  If they then sell this item within 2 years, the charity will be required to report this sale to the IRS on a Form 8282.  This is commonly used when someone wishes to bless a charity by giving them a part or all of a piece of real estate, just before closing as discussed in #9 above.  The title company should have the charity file the required Form 8282 at closing.  I suggest that the taxpayer also file this Form 8282 with their tax return in these circumstances.

And remember, Jesus said, “It is more blessed to give than to receive.”

For more information:   See IRS Instructions to Form 8283 ]]> http://www.taxmantom.com/overlooked-deduction-items-donated/feed/ 0 http://www.taxmantom.com/e-file-irss-april-fools-joke/ http://www.taxmantom.com/e-file-irss-april-fools-joke/#comments Mon, 01 Apr 2002 16:30:22 +0000 Tom http://www.taxmantom.com/?p=54 Written by Tom Umstattd, CPA, April 1, 2002.

Some of my colleagues offer electronic filing (E-File); I do not, yet.  This procedure is currently most appropriate with low-budget, seasonal, non-CPA tax return preparers who prepare 1000s of very fast and easy returns with refunds; we prepare almost no easy returns.  We first looked into E-Filing about 8 years ago and every year since.  When a return is E-Filed, the “pertinent information,” according to the IRS, from a tax return is downloaded via the internet directly into the IRS’s computer system.  E-Filers cannot send explanations or attachments.  When a return is filed via the mail, IRS employees keypunch certain entries from the return.

If a return, as the IRS calls it:  gets “kicked out of the pipeline” or, gets selected with “audit potential” by other means, then an IRS employee looks at the paper filed return with all of the attachments and explanations and professionally decides whether to proceed further.  But for E-Filed returns, were no paper is filed, then the IRS is left with little alternative but to contact the taxpayer and begin the arduous experience of examining the taxpayer’s receipts and records which corroborate his or her income, deductions, etc.  And, if the IRS goes through this much trouble, as many of you already know, they tend to examine everything.  Ray Sommerfield, one of my UT tax professors warned us, “When it comes to audits, the IRS has determined that there’s a lot of gold in ‘them thar hills.’”  For example, we have many philanthropic clients who give more than 10% of their income to charities.  This 10% benchmark is one of the IRS’s benchmarks for high audit probability.  If we can attach statements from 1 or more of the charities proving most of the charitable contributions deduction, we have likely assuaged an audit.  This cannot be done with E-Filed returns.

Perhaps the IRS’s chronic lack of security measures is the best reason not to E-File.  Click here for our privacy policy.  Government investigators each year try to hack into the IRS’s computer system, and each year are able to access private information from E-Filed returns in the IRS’s computer system.  Each year we link to an article on this website concerning this reoccurring problem, but these links seem to expire quickly.  So this year, I have copied an Associate Press article in its entirety.  It is now below.  Note:  a hacker can retrieve information and exit without the IRS even knowing that they were ever there.

Study:  IRS Data Open to Hackers, Thursday March 15, 2002, 1:24 PM ET

WASHINGTON (AP) –Government investigators were able to hack into the Internal Revenue Service computer system last year and access Social Security numbers and other sensitive information from electronically filed tax returns, a congressional report said Thursday.

“We demonstrated that unauthorized individuals, both internal and external to IRS, could have gained access to IRS’ electronic filing systems and viewed and modified taxpayer data contained in those systems during the 2000 tax filing season,” the General Accounting Office report stated.

The investigators said they were able to gain access to taxpayer information because the IRS had not securely configured its operating systems, implemented adequate password management practices or used encryption technology.

The IRS said it had no evidence that real intrusions actually occurred, but the GAO concluded the agency did not have “adequate procedures to detect such intrusions.”

The IRS also said in its response that it had taken steps to better protect taxpayer privacy this year.

Sen. Fred Thompson, R-Ten., Chairman of the Governmental Affairs Committee, asked for the investigation.