Q: I spent three years creating a large, detailed operating model of a ship, spending about $1,200 on materials. I believe its fair market value is about $45,000. Last year a museum expressed interest in receiving it as a donation. My problem is in how to value the work for the purposes of a tax deduction. I know that volunteer time spent on behalf of charitable organizations cannot be deducted, but I never intended to volunteer my time when I started this project. I would like to make the donation, but will not unless I can know in advance what my tax situation is. --T.P.
A: An artist donating his own creations to a charity may not take a deduction for their fair market value. Artists are entitled to deduct only the actual costs of creating the artwork. Usually this covers only materials and ancillary expenses. In your case, you would be limited to a $1,200 deduction--the amount you said you spent on materials--if you make the donation to the museum.
Why does the government take this position? The value of the time you invested in the creation cannot be deducted because you never received any compensation--and never paid any taxes on that compensation--for that time. The government is not about to give a tax deduction for something it has never received taxes for.
Figuring Out Those 401(k) Calculations
Q: Every quarter I get a statement from my 401(k) plan listing the contributions to the account, which is in a mutual fund operated by Fidelity Investments, and how it has performed. How do they calculate the investment gains or losses? And how do they calculate the percentage for the fund’s performance? I have tried to find this out and have had no success. --M.B.
A: The calculations that you see on your quarterly statement listing the gains or losses in your account are based on the changes that have occurred since the last statement date. Usually these statements cover the last calendar quarter, but some investment companies mail monthly statements.
Your statement should clearly state the period it covers somewhere prominently on the page. It will then detail the activity in the account during the period. The initial, or beginning, balance is the amount your account had on the first day of the reporting period; the current account balance is its value at the end of the period. Your statement should also list your contributions to the account, any contributions made by your employer, as well as dividends or interest earned by the account.
Finally, the statement may also include a line for “investment gains or losses.” Many 401(k) plans are invested in mutual funds whose values rise and fall with the stock market.
Let’s say that the total value of your account rises $5,000 over a three-month period, an amount that includes contributions of $2,000 from you and $1,000 from your employer. Where did the extra $2,000 account increase come from? The rising value of the stocks in the mutual fund’s portfolio. But remember, the stock market also falls. Even if you continue to make regular contributions to your account, it can lose value if the funds are invested in stocks that are declining.
Fidelity Investments says its mutual fund performance calculations are based on the fluctuation of the prices of the stocks in the fund between two particular dates. The performance calculations also take into account any dividend payments generated by the stock holdings. These calculations are made on a weekly, a quarterly and an annual basis and are so reported.
However, a spokesman for Fidelity says its funds’ weekly performance calculations that are carried by the business sections of most newspapers are based solely on stock performance and do not include the effects of dividend or interest payments.
Fund participants may call a special 800 telephone number for a weekly update that does include the effects of dividend payments. Your statement should include the 800 number you can use.
No Tax Breaks Come With Age
Q: I am 75 years old and work about 32 hours a week. Social Security and Medicare taxes are withheld from my paycheck. I was under the impression that I could earn any amount without having these taxes withheld from my pay. Can you explain what is going on? --C.R.B.
A: You are confused. Social Security rules impose a limit on the amount of money recipients under age 70 may earn while still receiving their full Social Security benefits. After age 70, Social Security recipients are entitled to unlimited earned income without losing any of their monthly benefits payments.
These rules have nothing to do with the government’s withholding of income, Social Security and Medicare taxes from a wage earner’s paycheck. These taxes continue to be withheld from paychecks regardless of the wage earner’s age. So, although you are entitled to earn as much as you can while still getting full Social Security benefits, you are expected to pay the same taxes on those earnings as anyone else.
Savings Bond Donor Responsible for Taxes
Q: I own a number of Series E U.S. Savings Bonds worth approximately $30,000. Their original cost was about $8,000. I have not paid taxes on the accrued interest. I would like to donate some of these to a favorite charity. Would the charity be liable for the tax on the accrued interest when it redeemed the bonds? --C.I.
A: The recipient of your gift isn’t liable for the tax on the interest; you are. Unlike stocks, whose untaxed appreciation can usually be given away as a charitable contribution without tax consequences to either the donor or recipient, the accrued interest on savings bonds is fully taxable to the donor.