Taxpayers generally do not think about the tax benefits of donating artwork and other collectibles until the opportunity presents itself. Needless to say, the potential tax deduction is an attractive incentive but the amount of the deduction is determined by a number of factors, including the legal status of the recipient organization and how that organization will use the donated item. This blog serves to simplify some of those considerations.

Tax Benefit and Limitations

U.S. tax law provides a favorable income tax deduction for contributions of artwork and collectibles to public charities and private operating foundations. If you donate artwork that has appreciated in value and is considered capital gain property, you can deduct the fair market value of the contributed art up to 30% of your adjusted gross income (AGI). If you are unable to utilize the full deduction in a given year as a result of this 30% AGI limit, you may elect to carry forward the unused portion for up to five years.

What Else Should I Consider?

The intended use of the donated item by the recipient organization is a very important consideration. This is often referred to as the “related use” test. If the organization uses the donated artwork in a manner consistent with its charitable purpose and function, then your tax deduction will be based on the fair market value of the contributed item. However, if the contributed item does not relate to the recipient organization’s charitable mission, the allowable deduction is the lesser of your cost basis in the artwork or its fair market value. This can substantially limit the amount of your deduction allowed.

Obtaining an Appraisal

Once you have decided to donate artwork or collectibles to a qualifying organization, the most important step is to obtain a qualified appraisal. The IRS requires a qualified appraisal, made within 60 days of the contribution date, for any contributed artwork valued in excess of $5,000. You must then complete IRS Form 8283 which is required for all non-cash contributions valued in excess of $5,000. The certification of the appraiser (Part III) and acknowledgement by the charity should be included with Form 8283. If the artwork or collectible has been appraised at $20,000 or more, a complete copy of the signed appraisal should also be attached to Form 8283 and filed with your personal income tax return.

Sell your artwork as an alternative

Before making the final decision to contribute a work of art, it is important to take a step back and also consider the other option at hand. Selling your artwork and paying the capital gains tax can sometimes deliver more financial benefit to your wallet instead of donating. There are a number of factors to consider, including income tax rates, AGI limitations and your original purchase price. If your intentions are not primarily philanthropic, it may be useful to have your tax advisor run both scenarios to see if donating or selling your artwork is more beneficial to you financially.

Questions? Contact any member of our Private Client Services Group.