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Charitable Contributions, Beware!

Roy Lewis
November 17, 2006

As we noted a few months ago, the Pension Protection Act of 2006 made quite a few changes to the laws regarding charitable contributions. It appears that Congress believes that there is way too much "slop" being reported as charitable contributions, and the IRS is only too happy to diligently enforce their revamped distinctions on charitable giving.

Last year, the rules for donating a vehicle changed substantially. While the statistics for the 2005 tax filing year (the first year in which the new rules were put into place) have not yet been published, expect to see a significant drop in the charitable contributions of autos, boats, and the like. It appears that quite a few taxpayers out there were making bogus claims and overstated valuations on donated autos.

In essence, under the new rules, if you donate a motor vehicle to a charitable organization, your deduction is limited to the amount that the charity receives when it sells the vehicle -- regardless of the Kelley Blue Book value. Additionally, the charity must provide you with Form 1098-C reporting the amount of the sale. If you don't receive a Form 1098-C from the charity, it's virtually certain that you'll have no tax deduction. If the charity does not sell the vehicle, but uses it in their charitable activities, then the "fair market value" is allowed for the deduction. Still, the charity is required to issue Form 1098-C to you for your records, and to advise you of how it used (or sold) the vehicle.

Because of these law changes, many charities have gotten out of the auto donation business, and many more taxpayers have decided to sell, rather than donate, their old clunker.

It seems that Congress, encouraged by the 2005 law changes, decided to excise even more questionable charitable contributions on the tax return.

Starting Jan. 1, 2007 for calendar-year taxpayers, you have two sets of rules to follow: those for cash/check contributions of $250 or greater, and those for less than $250. For contributions greater than $250, you must have a written acknowledgement from the charitable organization to be deductible, as per previously existing laws. For those under $250, you still must have some sort of receipt, or you'll receive no deduction. A can