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Donating Art: Taxation Abstraction

The varied reasons to donate art include a personal affinity for a museum, the desire to create a legacy, and the tax consideration that may come with the donation.

The tax rules surrounding the tax deduction of art are complex and confusing.¹

When donating art, donors can generally claim a federal tax deduction of up to 30% of their adjusted gross income each year. If the value of the donation exceeds this 30% limit, the excess can be deducted in subsequent years—up to five years—subject to the 30% limit in each year.²

Where It Becomes Complicated

The deduction may be based on the appraised value of the donated artwork if the recipient qualifies as a public tax-exempt organization, which is generally defined as an institution that receives at least a third of its financial support from the public. Museums, schools, hospitals, and churches are examples of a public tax-exempt organization.

If you are donating art to a private tax-exempt organization, e.g., a private foundation, your deduction will be based on the price you paid for the donated art.

Even if you are donating art to a public tax-exempt organization, a deduction based on the appraised value requires that the donation be related to the recipient’s mission—a requirement not likely met by organizations other than museums. A failure to meet that test results in a deduction based on the purchase price.

Look Before You Leap

Even if your donation passes the test, potential land mines remain.

If the recipient sells the donated art within three years, the allowable deduction will revert to the purchase price instead of the appraised value, leaving you with a potential exposure to back taxes. Since you are able to negotiate the terms of your gift, you may want to secure a promise not to sell the art within three years of its donation.

The Internal Revenue Service may choose to challenge your appraisal with its own to ensure against inflated appraisals. Penalties can be stiff, so you should make sure your appraiser has facts, such as comparable sales, to back up his or her appraisal.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  2. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific art donation.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.

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Self-Employment Retirement Plan Maximum Contribution

Compensation for a self-employed individual (sole proprietor or partner) is that person’s “earned income.”* The starting point to determine the individual’s earned income is the net profit amount from the Schedule C (or Schedule K-1 for a partnership). Use this calculator as a starting point to assess your potential maximum contribution amount for a Self-Employed 401(k), a SIMPLE IRA, or an SEP. *Earned Income = Net Profit – 1/2 of Self-Employment Tax – Contribution

Plan Information

This is a hypothetical example used for illustrative purposes only. This worksheet provides an estimate based on certain assumptions. It is not intended to provide specific investment advice. Distribution rules are similar for most retirement plans, including 401(k) plans, SIMPLE plans, and SEP IRAs. Distributions are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. With 401(k), SIMPLE plans, SEP IRAs, account owners generally must begin taking minimum distributions after reaching age 70½.