Donating a car or boat to a charity is no longer as attractive as it once was, and, since a 2005 tax rule change, the paperwork required is a lot more extensive. That means advisors need to examine their clients' reasons for giving, and make sure they act well before year-end.
Before the rule change, an individual could donate a car to a charity and deduct the fair market value as determined by Kelley Blue Book or a similar resource. However, since 2005, individuals have only been able to deduct the actual amount the charity receives from the sale of the car.
"It had a chilling effect on car donations,” says Thomas Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla.
Then there's the paperwork. When individuals donate cars or other forms of property valued between $500 and $5,000, they must file IRS Form 8283 for tax deductions. If the client wishes to donate a car, he or she needs to describe the condition of the car and explain how its value was determined. If another form of property is being donated, the client needs to state how and when it was initially obtained.
Clients also need a receipt from the charity, along with written documentation indicating whether the property will be sold or used by the organization. Deductions of more than $5,000 require written appraisals from qualified professionals.
Donors themselves have to keep track of the documentation for such donations in the event of an IRS audit, and can't rely on the charity they donated to, says Kevin Meehan, regional presidentat Wealth Enhancement in Itasca, Ill.
All this means that both clients and advisors need to plan ahead.
"If a client feels some sort of urgency at year end, and I'm wondering if they're giving for reasons such as the tax deduction, I would urge them to make their tax advisor aware of the gift as early as possible -- late November or early December -- to ensure that expectations are met and objectives are achieved," says George Pennock, vice president and regional fiduciary officer at Bank of the West in Denver.
The decision is further complicated by the fact that, with interest rates so low, it may not be worth it for some clients to itemize at all, says Harriet Brackey, co-chief investment officer and director of investment at KR Financial Services in Hollywood, Fla.
"Whenever my clients wonder aloud about certain tax deductions, I recommend that they work with their tax advisor to compare what would they get by itemizing versus a standard deduction," Brackey says. She says an increasing number of clients no longer benefit from itemizing and taking a mortgage interest deduction.
Katie Kuehner-Hebert is a writer in Running Springs, Calif. She's contributed to American Banker, Risk & Insurance and Human Resource Executive.