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The Kelley Blue Book is No Longer the Last World in Deduction and Appraisal When Donating an Auto to Charity
from:There was once a time when the Kelley Blue Book was used by most people when they were looking up what to value their car at when taking deductions at the end of the year for donated vehicles. However, since 2005, IRS regulations have much more clearly stated how one can value a vehicle that is donated to charity.
This has had a very large impact on vehicles that don't run or are otherwise unsuitable to be given to anyone to drive. Such vehicles were, for many years, assigned a value out of the Kelley Blue Book, as if they ran.
What most people failed to realize is that even the “poor” rating in the Kelley Blue Book referred to cars that were legal and safe to drive as well as actually moving under their own power. However, most cars that were donated to charity in the early 'aughts were not even running – often rusted hulks there were good for little else than parting out after a wholesale auction. This is, of course, where most of them ended up.
Despite this discrepancy, it is very common for people to take deductions that are listed under the “fair” column of the Kelley Blue Book rather than what the car was actually worth. When you read it carefully, the “fair” description of a vehicle actually describes one that is in rather good shape.
That's where the IRS stepped in. After a report to the Senate Finance Committee from the US General Accounting Office in late 2003, it became apparent that more than half a billion dollars had been deducted that were not actually given to the charities in question. This was partly due to people taking the wrong values for their deductions from the Kelley Blue Book.
However, the biggest culprit that made this formerly small loophole a large-scale tax dodge were for-profit companies that handled the donation and sales for non-profit organizations. Many were quite small NPOs that didn't have facilities for taking care of non-running donations. These companies furthermore were encouraging people to take the maximum benefit from the Kelley Blue Book that they could find.
Of course, this is not what the IRS ever meant. However, the regulation has since been clarified to more accurately reflect what was meant by fair market value. It means that rather than taking the highest available Kelley Blue Book value, you should choose a value that someone would actually be willing to pay if you were selling the car yourself.
To further clarify this, they have also ruled that if the car is worth less than $5,000, the value claimed for any car that is directly sold is the sale value of that vehicle. So, if sold on the wholesale market by a third-party agent, you could only claim that amount, even though it may be a fraction of what your car is actually worth, regardless of the Kelley Blue Book price.
Vehicles that are thought to be worth more than $5,000 should be verified by an independent auditor and photographed for documentation purposes. One doesn't have to actually attach either of these (or a photocopied page of the Kelley Blue Book) to their tax return, but a Form 8283 must be attached, even for donations of more than $500.
So, though you can't simply take the highest value available for your make and model from the Kelley Blue Book, you can still use it to help you determine what someone might pay for a car with the same coughs and dings as yours, just as anyone deciding what the market will allow. You should also consider what cars are selling for in the newspaper.
Even if you can't get much out of the corrected Kelley Blue Book value of your car, donating to charity is a good way to make an impact in your community. Moreover, you can usually claim up to $500 without too much bother, and most people can use even that small of a tax deductible if they're self-employed.
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