Juarez (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity). The painting cost Juarez $2,000 ten years ago and, according to one of Juarez's friends (an amateur artist), now is worth $40,000. On his income tax return, Juarez deducts $40,000 as a Form 1040 charitable contribution. Upon later audit by the IRS, it is determined that the true value of the painting was $30,000. Assuming that Juarez is subject to a 24% marginal Federal income tax rate, his penalty for overvaluation is:

Question

Quizplus · Accepted Answer

Juarez's deduction was based on an overvaluation of the painting. However, the penalty for overvaluation applies only if the claimed value is 150% or more of the correct value. Juarez claimed $40,000, which is not 150% of the true value of $30,000. Therefore, no penalty applies.

Juarez (A Calendar Year Taxpayer) Donates a Painting to a Local