Editor’s note: Linda Markus Daniels is a founder of and principal in the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.What do WUNC, the National Adoption Center, American Council for the Blind, Habitat for Humanity and Mothers Against Drunk Drivers all have in common?

They are all hoping that you get tired of trying to sell your used car and donate it to them. If you are thinking about doing this, however, the tax law are about to change on January 1, 2005; any donation is likely to net you a much smaller deduction if you procrastinate, so do it this year before the tax law changes.

Current Law

For the next month, if you donate a vehicle worth $5000 or less you are permitted to deduct the “fair market value of the vehicle.” For vehicles worth more than $5000 you can deduct the “appraised value.”

For the purposes of the tax deduction related to a vehicle, the IRS defines fair market value as “the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.” The IRS recommends that for the purposes of determining fair market value you look to the “blue books,” published by certain commercial firms and trade organizations, containing complete dealer sale prices or dealer average prices for recent model years. For more information on these requirements, refer to IRS Publication 561, Determining the Value of Donated Property.

Deductions after December 31

The IRS has issued new guidelines for auto donations effective January 1, 2005, ostensibly to reduce overvalued auto donations (but also to reduce deductions and thereby increase taxes paid). Beginning on that date, you can claim up to $500 for any donated vehicle. The deduction for any vehicle valued over $500, however, will depend on what the charity plans to do with the car. If it is sold (which is what normally happens), then the deduction is restricted to the gross proceeds actually received for the sale of that vehicle by the charity or its representative. The charity will be required to send you a written acknowledgement of the price it was able to obtain (usually a heavily discounted auction price), and you will not be able to take the deduction without that notice.

If the vehicle is used by the charity then you can claim the fair market value of the vehicle. Under all circumstances, the person donating a car valued above $500 will have no idea of the donation value until it gets the notice from the charity, and will be unable to compare the value of the donation to the other alternatives available related to the vehicle.

Make Sure your Donations is to a Charity

Do not go to the “donate your car to charity” sites in the Internet. Some of these are total scams. Others of these are for-profit entities, which could result in your not being allowed to take any deduction. Even if the entity is legitimate, it is possible that the donation may not be used for the charity you wish to support. Be sure your car is donated directly to the charity you select in order both to be able to take the full deduction and to support that specific charity. Contact the charity of your choice to determine how it handles the donation and follow its instructions.

You can check to see if an organization is qualified for a deduction by checking IRS Publication 78. Churches, synagogues, mosques and temples are not required to apply to the IRS for this exemption to be qualified, and thus even though not listed in Publication 78 donations to these institutions will be tax deductible.

Other Things I Learned on the Way to Donating My Car

There area few things I learned recently about this process, which are worth passing on. First, the donation can be completed prior to the car actually being picked up. So, if it’s only a few days before December 31, you can still turn over the title or otherwise “complete” the donation, and then a pick up in 2005 is okay.

You will need to retain evidence of your car donation and be able to substantiate the fair market value. To claim more than $250 you will need a written acknowledgement from the charity that includes a description of the care and a statement that you did not receive any goods or services in return (or if you received any goods or services, a statement providing the value of such goods or services).

Don’t forget to take the license plate off the car and turn it in to the Department of Motor Vehicles before December 31. While you can turn it in afterwards you may have to spend unnecessary time dealing with tax notices issued on the assumption that if you had the plate on January 1 then you owned the car on that date and therefore owe property tax on the car for 2005.

Finally, don’t forget to cancel your insurance once the car is picked up.

Remember, to claim the full fair market value of your car donation under current tax law, you must donate your car before midnight, December 31, 2004.

Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Linda Markus Daniels concentrates her practice in the representation of entrepreneurial and technology-based businesses, focusing on corporate, technology and international matters. Comments or questions can be sent to ldaniels@d2vlaw.com