06:30 PM PST on Thursday, December 9, 2004

By ALLEN SCHAUFFLER / KING 5 News

Thinking about donating your car to charity? Better put the pedal to the metal if you want the best tax deduction. As Allen Schauffler explains in this week’s Legally Speaking, the IRS is changing the rules about this popular write-off.

When Lisa found out she was having twins, she knew her beloved little red convertible wasn't going to be a fit for the family.

“It just wasn't practical for our lifestyle anymore," said Lisa.

Instead of selling her car, she donated it to charity.

"We are going to deduct it off our taxes," said Lisa.

Lisa is lucky - she made her donation before the end of this year. Come January 1, the old rules for giving your car away are gone.

“The IRS is sort of scrutinizing the program," said Donna Levalley, tax expert.

Levalley says one very popular loophole is being closed. Taxpayers like Lisa could get rid of older cars and deduct the full market value of the vehicle as listed in the Kelly Blue Book. Legally Speaking, the practice was perfectly alright. In reality, the book value and actual value can be quite different, with big dollar deductions often taken for clunker cars.

"Starting in 2005, if you make a car donation, they're going to want to know what the charity does with the car," said Levalley.

And now the deduction will have a more solid basis in reality. When the charity sells or auctions the car, you'll be able to deduct only what someone actually paid for it.

As for Lisa, she likes her new car and loves her old-fashioned tax deduction - an option that is driving out of the tax picture on January 1.

And no matter when you donate your car, tax experts say you should take plenty of pictures inside and out, and keep any old service records you have. That will bolster your case for a deduction if for some reason the IRS questions it.

Also, the new rules won't apply if you’re claiming less than $500 for the car boat or plane you’re donating.

There are some other exceptions to the new rules. For instance if the charity uses a donated vehicle, or makes repairs that improve the value of the vehicle, then the donor will be allowed to make the old-style deduction of fair market value.

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 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 800-829-1040 or for TTY/TDD help, call 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.