Skip to Content

We are a Veteran Owned Business, providing 20% discounts for Veterans, First Responders, Elementary and High School teachers. Please contact us to set up a phone or Zoom meeting. Taking care of you and your family, It's What We Do!

Klenk Law

Maximizing Charitable Income Tax Deductions When Donating Art

Posted on Thu Sep 20, 2012, on Estate Planning

Most Recently Updated November 5th, 2017.

 

From Our “Ask a Question” mailbag: How Do Go About Maximizing Charitable Income Tax Deductions When Donating Art?

Maximizing Charitable Income Tax Deductions When Donating Art

Maximizing Charitable Income Tax Deductions When Donating Art.

If you are an art collector interested in giving a piece of art to a charity, what factors should you consider to maximize your income tax deduction?

The Short Answer.

Short Answer. If a person as a collector contributes highly appreciated art purchased and held over one year to a qualified public charity and reported the contribution along with a supporting appraisal (if the art exceeds $5,000.00 in value) the person will avoid recognizing the built-in capital gains. Also, avoid paying inheritance and estate taxes.  Further, the person will be able to deduct the full fair market value of the donation as of the date of the contribution.

The Longer Answer.

Long Answer. The Tax Code encourages the contribution of art to tax-exempt organizations by allowing deductions against income for the gift. The size of the deduction will depend on several factors.

Things Change Quickly.

Use this information for background, but verify everything with a tax professional before acting. The tax laws are ever-changing. Make sure you have the most current data.

The Factors.

Owner’s Status. The first step in examining the tax consequences of gifting art is to determine if the taxpayer is a collector, a dealer, the artist or an investor. Much larger deductions are available for collectors.  While the tax advantages of charitable donations by dealers, the original artist and investors are more limited.

Gains in the value of Art held for more than one year are considered long-term capital gains if the person is a collector.  While the IRS believes those same gains are ordinary income if the owner is a dealer who holds the art as part of his business inventory. A collector’s donation of artwork with built-in capital gains generates an income tax deduction valued at the artwork’s full fair market value.

The income tax deduction is limited to the person’s basis in the property if the sale of the artwork would generate ordinary income. Which is the case with an art dealer, someone who has held the art for less than one year (short-term capital gains property) or the artist herself.

So, for example, say an art dealer in Philadelphia purchased a work of art for $100,000 that was worth $500,000. Subsequently, the dealer contributed that art to the Philadelphia Museum of Art.  The dealer would only receive an income tax deduction of $100,000.

Using the same facts, an art collector making the purchase and holding the art over a year would receive a $500,000 income tax deduction.

If the original artist contributed the $500,000 work to the museum, she would only receive a deduction for the materials used in creating the work.

What is a Public Charity?

Public Charity: An organization recognized by the IRS as a public charity must receive the gift. IRS Pub. 78. lists most charities. Also, public charities are usually more than happy to provide the potential contributor with proof of their public charity status. Contributions to private charities are limited to the giver’s basis.

Related Use. To qualify for the maximum deduction, the gifted art must be something customarily retained and exhibited by the public charity.  Further, it must relate to purpose or function constituting the basis the charity’s status as a public charity.

Document Everything.

Creating the Paperwork. Generally, if the public charity wants the offered art as a gift the staff will create the necessary paperwork proving that it is a public charity and that the donated artwork satisfies the related use rule. The contributor will include the paperwork along with Form 8283 (Noncash Charitable Contributions) on the collector’s income tax.

If the value of the donated art is greater than $5,000, the taxpayer must obtain a “qualified appraisal.”  The appraisal must be obtained no more than sixty days before the donation. See IRC Section 170(f)(11)(C). This qualified appraisal must be attached to the taxpayer’s tax return, as it is the value the IRS can accept as the deduction. A “qualified appraiser must conduct a qualified appraisal.” 

Appraiser Criteria.

The appraiser must meet the criteria, found in IRC Section 170(f)(11)(E)(ii). (1) Firstly, he must have earned an appraisal designation from a recognized professional appraiser organization or have met professional education and experience standards. Also, (2) He must regularly perform appraisals and receive compensation for such assessments.  Lastly, (3) he must meet other guidelines as prescribed by the IRS (there are several). Selecting wisely is important. If the IRA rejects the appraisal, the resulting reduction of income tax deduction can easily result in additional income taxes, interest, and potential penalties.

The IRS’ Office of Art Appraisal Services reviews all appraisals.  They may or may not choose to accept the qualified appraisal value. If the Office does not accept the value, or if the appraised value exceeds $20,000, they refer the matter to the Commissioner’s Art Advisory Panel. Comprised of twenty-five art experts, the Panel evaluates the art without tax implication knowledge. 

For example, if the donator is deducting the gift as a charitable contribution on an income tax return, the taxpayer would benefit from a higher appraisal.  In contrast, if the art evaluation was for estate tax purposes, a lower value benefits the taxpayer. The IRS accepts Panel’s findings as the final value of the art for tax purposes. Statistics from 2008 show that the IRS accepted approximately 42% of qualified appraisals submitted without Panel review. And the Panel recommended adjustments of roughly 56% of the matters referred to the Panel.

Statement of Value. If the contributed art exceeds $50,000 in value the donor may request that the IRS issue a Statement of Value. The donor may rely on a Statement of Value, avoiding potential penalties.

Maximizing Charitable Income Tax Deductions When Donating Art.

Space here doesn’t allow me to give a great deal of detail. So, if you would like more information I encourage you to read more about estate planning options including more advanced ideas using Irrevocable Trusts

In this Post, I tried to introduce you to the ideas related to Maximizing Charitable Income Tax Deductions When Donating Art. Further, I included links to even more detailed information on my website.  So, let me know how I did, comments and questions are welcome!

Furthermore, I would be happy to answer your questions.  If you have any other matters for a Philadelphia Estate Planning Lawyer, feel free to contact our office for a free consultation. We try to make the process as painless as possible!

Wills, Trusts, Probate, and Estate Litigation, It’s All We Do!

Author, Peter Klenk, Esq.

Throughout our website, klenklaw.com, you may find more information about Estate Planning. Also, our firm focuses exclusively in the area of estate planning, probate, and the litigation surrounding estate planning and probate.  This includes Will Contests and Will Challenges. Therefore, if you need assistance with any estate related matter call one of our Experienced Estate Planning Lawyers for a free consultation. We practice throughout New Jersey, Pennsylvania, New York, Minnesota and Florida.

Tags:

Appraisal, Art, Charitable, Donate, Donor, Estate Planning Attorney, Estate Planning Lawyer, Income Tax Deductions, IRS, Tatyana Gleyzer, Tax Code

What Our clients are saying

Klenk Law Logo
Stars

Peter has done our family's trust and estate work since our children were born. He is not only extremely knowledgeable and honest, but makes sure that our arrangements remain current with the changing legal landscape. I would give him my highest recommendation as a professional in his field.

Klenk Law Logo
Stars

When it came down to picking the right attorney to handle my affairs, I knew right away it was this firm. From speaking to their secretary to speaking to Peter I knew I was making the right decision. After only a few mins Peter knew right away what I was looking for and handled all my questions professionally and even gave me great feedback that put my mind at ease. All that without even giving a single penny! So of course I hired him! So far so good...

Klenk Law Logo
Stars

Fantastic customer service. Very personable and most importantly they provide great explanations of what is required based on your individual needs. Highly recommend Klenk Law for anyone that needs to create a will and estate documents.

Klenk Law Logo
Stars

Peter Klenk & Associates is my go-to firm for estate planning and advice in probate and estate administration. Peter and his attorneys are top-notch and exceptionally responsive. Peter has the knack of being able to explain extremely complex tax and estate planning issues in a manner that clients are easily able to understand and comprehend allowing them to confidently make important decisions.

Klenk Law Logo
Stars

Answered my question quickly and referred me to a colleague that could handle my problem

Let us put our expertise to work for you.

Free consultation within 24 hours.