Dear Norman – Donating Artwork

By December 11, 2018Dear Norman

Dear Norman,

Thank you for all your contributions to our civilization. You are not just THE man, you are my everything. I would always always always follow your worldly advice.

I am somewhat nervous writing this because I am so in awe of your wisdom. But here goes with my question. I have been employed at Walmart for some time. Stocking the hardware department. Any way, I have always had an interest in Art. This has led to my collecting a sizable art collection. Renoir, Van Gogh, Andy Warhol, Justin Bieber.

My collections are very eclectic: Paintings, Sculptures, Paint by numbers, origami, prints, drawings, sculptures, and of course, finger painting. So my question is this. Tell me all the “Ins and outs of donating artwork to charity”

Please give me guidance, oh Great One

Sincerely,

Terence from Tacoma.


    

Dear Terence.

I am humbled that such a worldly man as yourself follows my columns. Quite heartwarming. 

One of my favorite topics is art collections. That is why I feel we connect.

If you’re charitably inclined and you collect art, appreciated artwork can make one of the best charitable gifts from a tax perspective. In general, donating appreciated property is doubly beneficial because you can both enjoy a valuable tax deduction and avoid the capital gains taxes you’d owe if you sold the property. The extra benefit from donating artwork comes from the fact that the top long-term capital gains rate for art and other “collectibles” is 28%, as opposed to 20% for most other appreciated property… Not Bad

Requirements

The first thing to keep in mind if you’re considering a donation of artwork is that you must itemize deductions to deduct charitable contributions. Now that the Tax Cuts and Jobs Act has nearly doubled the standard deduction and put tighter limits on many itemized deductions (but not the charitable deduction), many taxpayers who have itemized in the past will no longer benefit from itemizing.

For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for married couples filing jointly. Your total itemized deductions must exceed the applicable standard deduction for you to enjoy a tax benefit from donating artwork.

Something else to be aware of is that most artwork donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel.

[Now Terence, you and I both know that a Justin Bieber collection is going to be on the valuable side of the scale.]

The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

Finally, note that, if you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.

Maximizing your deduction

The charity you choose and how the charity will use the artwork can have a significant impact on your tax deduction. Donations of artwork to a public charity, such as a museum or university with public charity status, can entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, however, your deduction will be limited to your cost.

For your donation to a public charity to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. If, for example, you donate a painting to a museum for display or to a university’s art history department for use in its research, you’ll satisfy the related-use rule. But if you donate it to, say, a children’s hospital to auction off at its annual fundraising gala, you won’t satisfy the rule.

Plan carefully

Donating artwork is a great way to share enjoyment of the work with others. But to reap the maximum tax benefit, too, you must plan your gift carefully and follow all of the applicable rules.

    

A Note from Alan: If, like most of our clients, you are an artist and you would like to donate your own artwork, know that ordinarily that will not be tax-deductible. However, there is a way around this, which I like to call the Braverman Technique: if you have a friend who is an artist, you can sell your art to each other and once the art has acquired value, donate your friend’s art to charity. This will result in a higher deduction on your taxes, and you’ll be contributing to a good cause at the same time.

   


   

   


   

Any accounting, business or tax advice contained in this post, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.