Charitable Giving Can Turn Out to Be Taxing

When you donate a car to a charitable organization, in general, you can deduct the "blue book" or fair-market value of the car. The IRS gets concerned when that blue-book value is below $5,000. In that case, it is up to the taxpayer to determine the car's worth, and that opens the door to fudging.

If the value of the car is $5,000 or more, you'll need a written appraisal, so there's generally less leeway.

A bigger issue is that most charities sell donated cars to wholesalers, so they're not getting the blue-book value of your car, notes Fleming. So in many instances, you're taking a bigger deduction than the value of your donation.

Even worse, while the blue-book value of a 1995 two-door Jeep Cherokee Sport lists for around $2,000, the one sitting in your driveway may not have any brakes left. So your car is not really in blue-book condition. But odds are good that you'll take the blue-book deduction anyway.

So know for 2004 that if the IRS sees "car donation" anywhere on your tax return, that will raise a serious red flag, and you'd better have supporting documentation.

For 2005, the rules now say that your deduction must equal the money the charity made selling your car. That means the charity has to report back to you what it got for your donation. If it decides to keep and use your car, then you can take the blue-book value. Either way, the charitable organization must inform you of its intentions.

While this new rule may appease the IRS, it requires charities to do unwanted record-keeping. "We suspect that charities are not going to want the cars anymore," says Fleming. So donate while you still can.

Sweet Charity, Sour Taste

While it may make you feel great to be kind-hearted, the IRS will be sure to steal that warm, fuzzy feeling if you don't have your receipts.

For cash contributions of less than $250, your canceled check or charge-card statement will work if you didn't get an acknowledgement letter from the organization noting your generosity.