Is The Kelley Blue Book Used For Charitable Auto Donations?
The Kelley Blue Book – Deductions and Appraisals When Donating A Car To Charity
There was once a time when the Kelley Blue Book was used by most people when they were looking to find out the value of their car and at when taking deductions at the end of the year for their auto donations. However, since 2005, IRS regulations have much more clearly stated how one can value a vehicle that is donated to charity.
Was The Donated Vehicle Drivable?
This has had a very large impact on vehicles that don’t run or are otherwise unsuitable to be given to anyone to drive. Such vehicles were, for many years, assigned a value out of the Kelley Blue Book, as if they ran.
What most people failed to realize is that even the “poor” rating in the Kelley Blue Book referred to cars that were legal and safe to drive as well as actually moving under their own power. However, most cars that were donated to charity in the early ‘aughts were not even running – often rusted hulks there were good for little else than parting out after a wholesale auction. This is, of course, where most of them ended up.
Reading The Kelley Blue Book
Despite this discrepancy, it is very common for people to take deductions that are listed under the “fair” column of the Kelley Blue Book rather than what the car was actually worth. When you read it carefully, the “fair” description of a vehicle actually describes one that is in rather good shape.
That’s where the IRS stepped in. After a report to the Senate Finance Committee from the US General Accounting Office in late 2003, it became apparent that more than half a billion dollars had been deducted that were not actually given to the charities in question. This was partly due to people taking the wrong values for their deductions from the Kelley Blue Book.
However, the biggest culprit that made this formerly small loophole a large-scale tax dodge were for-profit companies that handled the donation and sales for non-profit organizations. Many were quite small NPOs that didn’t have facilities for taking care of non-running donations. These companies furthermore were encouraging people to take the maximum benefit from the Kelley Blue Book that they could find.
Car Donation Tax Deduction – What Does The IRS Expect?
Of course, this is not what the IRS ever meant. However, the regulation has since been clarified to more accurately reflect what was meant by fair market value. It means that rather than taking the highest available Kelley Blue Book value, you should choose a value that someone would actually be willing to pay if you were selling the car yourself.
To further clarify this, they have also ruled that if the car is worth less than $5,000, the value claimed for any car that is directly sold is the sale value of that vehicle. So, if sold on the wholesale market by a third-party agent, you could only claim that amount, even though it may be a fraction of what your car is actually worth, regardless of the Kelley Blue Book price.
Vehicles that are thought to be worth more than $5,000 should be verified by an independent auditor and photographed for documentation purposes. One doesn’t have to actually attach either of these (or a photocopied page of the Kelley Blue Book) to their tax return, but a Form 8283 must be attached, even for donations of more than $500.
So, though you can’t simply take the highest value available for your make and model from the Kelley Blue Book, you can still use it to help you determine what someone might pay for a car with the same coughs and dings as yours, just as anyone deciding what the market will allow. You should also consider what cars are selling for in the newspaper.
Even if you can’t get much out of the corrected Kelley Blue Book value of your car, donating to charity is a good way to make an impact in your community. Moreover, you can usually claim up to $500 without too much bother, and most people can use even that small of a tax deductible if they’re self-employed.
Fraudulent Auto Donation Deductions and Tax Laws
When giving its report on the rise of auto donation to the Senate Committee on Finance in 2003, the US General Accounting Office (GAO) found quite a bit of discrepancy between the amount of monies claimed as deductions on individual and business returns and the monies reported from actual automobile donation sales by non-profit organizations (NPO). As a result, certain changes were made to the existing tax laws that govern how deductions are claimed from automobile donation.
Tracking Auto Donation Proceeds
Though California was the only state that kept track of automobile donation proceeds at the time, it was found that third party organizations handling automobile donation usually took up as much as 70% of the amount received from the original sale of such a vehicle on the wholesale market. The exact amount depending upon the arrangement between the automobile donation organization and the NPO.
In California, third-party agencies that handle automobile donation are beholden to take only a given percentage of the sale, wholesale or not, as overhead expenses, no matter what those expenses actually are. As such, higher prices for vehicles are often achieved in private sales in that state, though such sales often take longer than automobile donation auctions in other states.
When the Finance Committee heard these figures and many more that proved the federal government was bearing the brunt of these donations in the form of donation discrepancy, the process to clear this problem with auto donation deductions was initiated. There’s nothing to get a sub-committee going like an estimated $600 million shortfall in tax revenues.
Charitable Auto Donations
This is not to say that someone using the blue book value of their car to describe a barely running rust bucket given as a charitable auto donation is setting out to defraud the government, but it certainly has the same effect. In that 2003 GAO report, the majority of tax returns investigated from 2002 showed an average actual donation to the charities of 1-5% of that reported as the original donation on the resultant tax forms largely due to the use of third party auto donation agencies and the use of wholesale and wrecking yard sales.
To this day, a large number of NPOs continue using third-party agents to facilitate auto donation. The lack of communication as to where the actual overhead expenses of the third-party auto donation agents were almost entirely lacking in detail – instead, lumping all expenses under categories such as “towing” or “other.” Indeed, bookkeeping has been a real problem with many of these setups.
In an effort to combat this discrepancy with auto donation, new rules were instated by the IRS that require a statement of monies received from the sale of the car, rather than the “fair market value” of the vehicle for vehicles netting over $5,000. Because of this, many who consider auto donation as a viable source of deduction have grown suspicious of letting third-party agencies handle the auto donation process for them.
For instance, if you have a vehicle with a fair market value of $10,000 and sell it yourself, you’ll net about $10,000. After you pay capital gains and income taxes on that amount, you should still have over $7,000 to donate to the charity of your choice, whether they take auto donations or not. This does depend upon your tax bracket, but that full amount will go to the charity and be legally deductible. A third party may be lucky to get $4,000 at auction and give less than $1,000 to your charity and giving a lower reported value to you.
Tax Deductions
On the other hand, since rules were tightened in the early ‘aughts by the IRS, vehicle donations of over $500 are officially valued for deduction purposes by their sale amount (usually at wholesale) or by an independent appraisal. In fact, you must provide a copy of such an appraisal if your net auto donation is greater than $5,000. Auto donations with a value of less than $250 are still allowed under the “honor system.”
Regardless of the value of your auto donation, the title must be free and clear. You are also responsible for providing the name and address of the charity, where the actual auto donation occurred (very often your home, if towed), a description of the car or truck and the date when the auto donation took place. If the auto donation is valued there or after the fact at less than $250, you must also have a receipt.
