Before 2005, taxpayers who donated a vehicle were allowed to deduct its fair market value. Tax legislation enacted in 2004 changed the rules to generally limit vehicle donation deductions of over $500 to either the actual proceeds from a vehicle’s sale or the vehicle’s fair market value -- whichever is less. . . .
[B]etween tax year 2004 and 2005, car donations of over $500 dropped by two-thirds. Over 900,000 tax returns claimed deductions for donated automobiles in 2004. In 2005, the last year for which the IRS has detailed data, less than 300,000 tax returns included such claims.. The total amount deducted for all car donations declined from $2.4 billion in 2004 to just a half a billion dollars the following year, a decrease of over 80%.... the total number of car donations fell by 67%, and the amount of deductions claimed as a result of such donations fell by over 80%, the deduction claimed per car donated . . . declined by 41%....
The total amount of deductions claimed for charitable deductions increased from $156 billion in 2004 to $172 billion in 2005. In 2006, the number increased again to $173 billion.
Needless to say, optimism concerning the fair market value of used cars abounded prior to the change in the tax law, something that serves as fair warning to policy makers considering any tax code provision dependent upon individualized estimates of fair market value (grants of conservation easements are another area of charitable giving that poses similar concerns).