Helping kids learn to sail...

The Tax Implications of Donating Your Boat
By Terri Cullen, The Wall Street Journal
May 11, 2007

Terri Cullen describes how she and her husband decided to donate a car to charity and deduct the value on their tax return. Her explanation works for boats as well.

The charity sounded like a good cause, so Gerry and I decided to look into how to donate our SUV. I wanted to make sure we did it right—writing off large non-cash donations, such as cars, real estate or art, is one of the quickest ways to trigger an IRS audit, according to the American Institute of Philanthropy. Indeed, in 2005 the federal government changed the rules regarding car donations after a study by the U.S. General Accounting Office found donors were overestimating the value of donated cars on their tax returns. According to the IRS, many taxpayers were deducting the cars' top guidebook values, regardless of the vehicles' actual condition.

We've got nothing to hide as far as the IRS is concerned, but we'd like to avoid any hassle. Since our SUV is such an old vehicle, we expected the write-off would be small—perhaps too small to risk an audit.

We itemize deductions, so the car's value would be deductible as a gift. (If we took the standard deduction, we wouldn't be able to write off the donation). We also needed to make sure the group I'd found qualified as a charitable organization in the eyes of the IRS. It was listed as a private, non-profit organization under IRS Code 501(c)(3), a status I verified by checking IRS Publication 78, which has a searchable list of all organizations that qualify to receive deductible donations.

How much of a donation can you deduct? Depends on what the charity does with the donated vehicle. Most charities sell the cars they receive; if we donated the car to a charity that planned to sell it to raise cash, the deduction couldn't exceed the gross proceeds from the sale. Large charities often sell donated cars in bulk to car dealers or auction houses, so the amount of the deduction could be as little as $50. In such a case, within 30 days the charity would provide a certification that the car was sold "at arms length" between unrelated parties, along with the sale price.

The charity we'd chosen will use our SUV for charitable purposes, rather than sell it, so under the new rules we'd generally be allowed to deduct the fair-market value of the SUV. To find the fair-market value, we checked the Kelley Blue Book's used-car value guide. [Note: Here's one boat value guide.] The IRS says the deduction can't exceed the "private-party value"—which isn't the same as the vehicle's trade-in value or the suggested retail value. I was shocked to see that the private-party value of our SUV in fair condition was $2,910. (Were the SUV in excellent condition, which it isn't, the value would be $3,830.)

Since the SUV's value is more than $500, we'd need to get a written acknowledgement of the donation from the charity, and attach IRS Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) and Form 8283 (Noncash Charitable Contributions) to our 2007 tax return. The charity's acknowledgment letter generally includes information such as the car's estimated fair-market value, the vehicle identification number, and specifics about what the charity intends to do with the vehicle. (If our SUV's value was $500 or less, we'd only need the charity's written acknowledgement.) If the vehicle was worth $5,000 or more, we'd also need to pay for an independent appraisal.

When I contacted the charity, I was told it would provide all of the information we needed, along with a document confirming the charity's tax-exempt status. Before the charity will accept the vehicle, however, our SUV needs to pass an inspection to make sure it's in good working order. After the transaction is complete, we'll drop the car from our insurance policy, and the registration fees, and save $324 a year.

But should we take the $2,910 deduction and risk an audit when we file our returns next year?
Mildred Carter, a senior tax analyst at tax-information publisher CCH Inc., says our concerns may be overblown. "I would assume that there would actually be less risk of an audit now, because there's such strict documentation required," she says. "Of course, the taxpayers who don't know about the rule change and are still valuing the cars based on the Blue Book may have some problems."
In general, the risk of being audited is low: About 1% of the 132.3 million returns filed in 2005 were audited. Still, the IRS increased the number of audits on individual tax returns to 1.3 million in fiscal 2006, from just 618,000 in fiscal 2000.

Gerry and I are at a slightly higher risk of an audit because our income level exceeds $100,000: About 1.67% of tax returns were audited for taxpayers earning between $100,000 and $1 million, though 56.4% of these were so-called correspondence audits, which usually just ask for additional documentation to back up information on the return. (Were we earning $1 million or more, the odds of an audit would jump to 6%—and more than half of those were field audits, in which the IRS rolls up its sleeves and digs deep into your finances.)

Gerry didn't want to invite additional scrutiny by IRS computers that home in on car donations, but I convinced him we should take the deduction. The average amount deducted for a car donation per return was $2,899 in 2003 (the latest data available), right in line with our SUV's value. So our deduction probably won't send up a red flag as being suspiciously inflated. And odds are if we are audited, it will be a correspondence audit—and we'll have the proper paperwork to back up the deduction. (To further support our claim, we'll take photos of the exterior and interior of the car and keep our maintenance records.)

But there's another reason I think we should take the donation—charitable contributions are one of the few deductions allowed under the alternative minimum tax (AMT), which we're likely to pay this year. The AMT was enacted in 1969 to make sure that wealthy individuals don't avoid paying federal income taxes. It was never indexed for inflation, however, and today many taxpayers making $200,000 or less are paying it—particularly those like us who live in areas with a high cost of living and high state and local taxes. The deduction will help offset the tax bite of the AMT—and we hope the donation will help a family less fortunate than ours.

The mission: The Arizona Sailing Foundation, Inc., will provide fun, safe, community based education in the art of sailing on a non-discriminatory basis.