New Tax Laws Dry up Car Donations
July 15, 2008 (Business Wire) -- Car donations have plummeted since Congress in 2004 tightened the tax rules for claiming charitable deductions, according to a Grant Thornton analysis of new IRS data.
Before 2005, taxpayers who donated a vehicle were allowed to deduct its fair market value. Tax legislation enacted in 2004 changed the rules to generally limit vehicle donation deductions of over $500 to either the actual proceeds from a vehicle's sale or the vehicle's fair market value -- whichever is less.
Recently released IRS statistics reveal the 2004 law had an immediate and drastic affect on car donations. An analysis of the new numbers by Grant Thornton's National Tax Office shows that between tax year 2004 and 2005, car donations of over $500 dropped by two-thirds.
Over 900,000 tax returns claimed deductions for donated automobiles in 2004. In 2005, the last year for which the IRS has detailed data, less than 300,000 tax returns included such claims.. The total amount deducted for all car donations declined from $2.4 billion in 2004 to just a half a billion dollars the following year, a decrease of over 80 percent.
"Congress was concerned that people were inflating the value of donated cars under the old system, claiming full blue book value for vehicles that had been turned down by the local junk yard," said Mel Schwarz of Grant Thornton's National Tax Office in Washington, D.C. "The hope was that charities would still get the same number of cars they could auction for the same amount of money, and the only change would be the elimination of excess charitable deductions. That hope was clearly not recognized."
It is worth noting that the although the total number of car donations fell by 67 percent, and the amount of deductions claimed as a result of such donations fell by over 80 percent, the deduction claimed per car donated only declined by 41 percent. "This suggests a generous tax deduction was not the only thing lost with this change," noted Schwarz.
Donations of vehicles besides automobiles also declined. The number of returns claiming non-car vehicle donations dropped over 25 percent from 2004 to 2005, and the amount claimed in deductions fell from $205 million to $140 million.
The new restrictions on car donations have not dampened Americans' overall generosity. The total amount of deductions claimed for charitable deductions increased from $156 billion in 2004 to $172 billion in 2005. In 2006, the number increased again to $173 billion.