Musicians have been asking me if the new tax bill passed by the House yesterday will have any impact on us. Yes, the legislation, if passed in the Senate, will greatly reduce the ability of professional musicians to deduct many of the expenses we incur in our work.
I should state right at the outset that it is possible that your taxes may be lower under the current proposal. That’s because the plan will increase the standard deduction from $6,350 (single) and $12,700 (married) in 2017 to $12,000 and $24,000 in 2018. As a result, it is believed that instead of 33%, the number of taxpayers who itemize will fall to only 10%. But it also means that if you have itemized deductions below $12,000 (single)/$24,000 (married), you will no longer receive any benefit from those expenses in 2018.
And if you have $25,000 of itemized deductions as a married couple, you are actually getting only $1,000 more in deductions than someone who has zero deductions and claims the standard deduction of $24,000. That means you spent $25,000 to only get an additional $1,000 deduction; in the 25% tax bracket, you will save $250, a 1% benefit of the $25,000 you spent.
I think many of us have had more than $12,000 or $24,000 in itemized deductions in the past, however, starting in 2018 the Bill also eliminates many itemized deductions, except for these three which will remain:
- Charitable Donations
- Property Taxes, now with a $10,000 cap
- Mortgage Interest, reduced from two properties to one, and reduced from a $1 million loan to $500,000 maximum
You will no longer be able to deduct:
- Unreimbursed Employee Expenses
- Medical Expenses that exceed 7.5% or 10% of your income
- Tax Preparation Fees
- Moving For Work (over 50 miles)
- Gambling Losses or Casualty Losses
- The $7,500 tax credit for a plug-in electric vehicle will be repealed
The first one, Unreimbursed Employee Expenses, is a huge hit to musicians who often spend tens of thousands on an instrument and supplies. There aren’t too many other jobs where an employer expects you to have $5,000, $50,000, or $500,000 in “tools” as a requirement of your employment. In addition to “Tools and Supplies”, losing Unreimbursed Employee Expenses also means you can no longer deduct:
- Union membership and work dues
- Dues to professional societies
- Home office expenses
- Educator expenses and college research expenses
- Travel, mileage, and meals for work
- Required concert clothes
This applies to musicians who are “employees” and receive a W-2 at the end of the year. When you are an employee, expenses go on Schedule A as itemized deductions. Other times, however, musicians are “independent contractors” and receive a 1099. If you are an independent contractor, you list business expenses on Schedule C and these expenses will continue to be valid under the Bill. It may be more advantageous for a musician to be an Independent Contractor if this Bill becomes a Law.
Many musicians have both W-2 income (say from a school or full-time orchestra) and 1099 income (church gigs, part-time orchestra, etc.). You will probably want to apply as many expenses as possible towards your 1099/Schedule C income going forward.
Please don’t take any steps until the final version has been made into law. However, if the House version passes the Senate, I think many musicians will want to be prepared to take steps to pay 2018 expenses before December 31, 2017. If you wait until January, either you will either lose those miscellaneous itemized deductions or may be below $24,000 under the new rules and end up taking the standard deduction. Better to take those expenses in 2017 and receive a benefit.
- Consider paying your property taxes in December 2017 rather than January 2018
- Make your 2018 charitable donations in 2017
- If you have unreimbursed employee expenses, go ahead and purchase reed supplies, music, concert clothes, etc. before the end of 2017
- Where musical expenses are genuinely part of your 1099 income, you will still be able to subtract those expenses on Schedule C. Look at past tax returns, how much of your income is W-2 versus 1099? If you continually lose money on your Schedule C, the IRS may rule that your “business” is actually a hobby and disallow your losses.
- If you want to reduce your taxes further, look instead at increasing your contributions to pre-tax accounts such as a 401(k), 403(b), Traditional IRA, SEP-IRA, HSA, or FSA. These are still going to be valid ways to reduce your taxable income.
Does your financial planner understand what it means to be a professional musician? We have deep expertise in helping musicians succeed with their financial goals. Send me an email and we can help you, too.
Comments
31 responses to “Musicians, You’re About to Lose Your Tax Deductions”
Good Morning,
Presuming the 24K married standard deduction is going to exceed my households deductions, how will property tax play into this. In other words, let’s say my total deductions (including property taxes) equals 18K, then let’s say the new tax laws take effect in 2018, will my wife and I get a 24K deduction PLUS the mortgage interest deduction (which for us equals 5K-6K) on top of it? After reading the last part of the story, it seems the answer is NO since the recommendation was to pay the winter taxes in December 2017.
But my confusion stems from the portion early in the article indicating the 10K cap of the “3 remaining deductions”. Is this more for people that run up, say, more than 24K in music business expenses and have 10K or more in property taxes (beyond the 24K already spend on music)? If so, would they get 24K deduction + up to 10K or am I misinterpreting the intent of the new potential tax system?
Many thanks,
Bill
Hi Bill, Unfortunately, taxpayers have to choose between the standard deduction (the proposed $24,000 for a married couple) OR your itemized deductions. If your itemized deductions are less than $24,000, you will just take the standard deduction. It would be nice to be able to do both, but that’s not allowed! It will be more difficult to reach the $24,000 level under this Bill, because it will only include charitable donations, mortgage interest on your primary residence, and up to $10,000 in property taxes. Best Regards, Scott Stratton, CFP, CFA
The increase in the standard deduction is mostly wiped out by the elimination of the personal exemption.
That’s an important point! The personal exemption of $4,050 (2017) goes away in this proposal. If you consider the tax-free standard deduction of $6.350 and the personal exemption of $4,050, that’s $10,400 of tax-free income. Not significantly less than $12,000. Thank you, Scott
The loss of personal exemptions is an element of the tax bill that is never mentioned by those who are selling the bill. If you are 65 or over, you will also lose the additional $1,250 personal exemption. So for senior citizens who take the standard deduction, you will gain $6,000 but lose $5,300 (4,050 + 1,250). So much for the greatest tax cut in history.
This article has created some confusion. It appears to be mostly regarding the few musicians with W-2 income. The majority of us self employed musicians file a Schedule C and our deductions have not changed.
Also, if you usually owe State income tax, estimate what you will owe for 2017 and make a payment before Dec 31. They will be happy to take your money and you will be able to deduct it in 2017.
Just blatant fear mongering. Your freelancing is a business and should be treated as such. Establish a business, file your expenses on Schedule C. This is the sentence that matters, “If you are an independent contractor, you list business expenses on Schedule C and these expenses will continue to be valid under the Bill.” End of story.
If you play violin for most orchestras, or teach at a school or university, you will be a W-2 employee. Many free-lancers have W-2 income from part-time employment or substitute work. Thank you! Scott
This impacts musicians who are w-2 employees and required to put their unreimbursed business expenses on a Schedule A . Self employed musicians write off their expenses on a Schedule C and will not be impacted by this provision.
Don’t forget the tax rates will drop which allows you to brIng home more money in your pay check. So you have to weigh it out to which is better. I prefer the money in my check so I can invest it and make money instead of letting the IRS keep it all year.
On another note the work relates expenses in this case a musician is subject to the 2% rule, meaning the deduction starts after 2% of your adjusted gross income. So if your AGI is $100,000 for example then the first $2,000 of your work related expenses are not deductible.
Work related expenses is a gray area anyway. The IRS is aware that most people take advantage of it without receipts and some tax professionals take advantage of it to make themselves look like the best the client could have and get referrals. I am a tax professional and worked for businesses that fully took of this deduction to the point where the client had no idea what he did but was very happy with there tax return!
That my take on it!
Good luck
Don D’Aquila
Registered Tax Preparer!
[…] you are a musician working in the US, you’ll probably need to read this analysis of what the new tax bill means for […]
Would it be it be more beneficial to form an LLC or a corporation as opposed to remaining and independent contractor?
Hi Kenneth, The House version of the bill includes a lower top tax rate pf 25% for pass-through entities like an LLC. So if someone was in the top bracket of 39.6%, making say $500,000 a year, it would make sense to form an LLC or other structure. However, the House version included a restriction on Service Professionals from receiving this lower tax rate by doing this. This would prevent Attorneys, Doctors, Artists, Musicians, and even Financial Advisors from receiving the lower pass-through tax rate. It’s not clear how this would be enacted and enforced, so it may not end up in the final version of the Bill. Stay tuned! I should add that it may still be desirable to form an LLC for liability and asset protection purposes even if we don’t end up with a lower tax rate for LLC’s. Thank you, Scott
This is an extremely helpful article for professional musicians. I would just add one additional benefit of the new law for musicians however, especially those with any foreign income, which is the repeal of the Alternative Minimum Tax. This is often described as of concern only to the wealthy, but that ignores the 10 million Americans abroad, most of whom are not wealthy (and many thousands of whom are musicians), who have to report their worldwide income in American dollars and pay taxes based on that regardless of the fact that they have already paid usually quite high foreign taxes on that very same income. Yes, there is the Foreign Tax Credit which in the usual case addresses this double taxation problem, but the AMT undercuts that by disallowing any foreign tax credit for a musicians foreign tax credit paid. The tax-paying American musician abroad still has to meet the minimum income threshold for the AMT to become relevant, but remember that the threshold is crossed whenever the musician’s income in foreign currency is equivalent to the same amount in US dollars, and that can be quite a low amount if you are paid in British pounds or Euros.
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Regarding freelance musicians vs. W2 musicians, woe to the freelance musician who substitutes for a local minor league orchestra. I substitute in a plethora of local orchestras, where I might play only one or two concert series in one ensemble’s bi-monthly season of five or six concerts a year. In these instances, subs are required to fill out a W2 form, and our wages reflect the normal W2 deductions: SS, Medicare, Federal and State withholding,and even worker’s comp. For all practical purposes we are freelancers, who are not afforded an iota of employment security. How do you feel we should treat deductions for those gigs vs. our more normally-occurring 1099 and cash gigs that pay scale and beyond?
Hi there,
Can anyone point to evidence that those on a 1099 Schedule C will be able to keep their home office deductions? What I’m seeing in news articles is that the plan eliminates ALL deductions for home offices. Here is text of the current bill:
https://billcam.dailyclout.io/bill-texts/8cRsH7BelV
Thanks in advance for considering the request. The tax changes appear labyrinthian to me!
Hi Jackie, The Bill should not change your ability to deduct a home office on your Schedule C, assuming you are using the home office for the 1099 or self-employment income. You should complete Form 8829, Expenses for Business Use of Your Home. See: https://www.irs.gov/newsroom/home-office-deduction-a-tax-break-for-those-who-work-from-home. Scott
Hey Scott, thanks! I appreciate it!
There was a somewhat prominent person on Twitter posting that deductions *would* be eliminated for Schedule C folks along with Schedule A (W-2). They kept posting updated revisions of the bill and claimed that this is a change since passing the House. Just trying to make sense amidst a lot of noise and confusion. :-/
[…] weeks ago, we posted how musicians would lose their tax deductions under the proposed tax bill in the Senate. Let me again state that this applies to musicians who […]
We need a real musicians Tea Party! Don’t Tread on Us!
I wish this (otherwise informative) article didn’t feel the need to use a misleading, clickbait title. I understand it gets people reading (myself included) but also unnecessarily scares some people who will actually not be affected, and somewhat diminishes trust in the source.
As you mention, independent contractors will not be affected by the (still shitty) tax bill.
All the same, I appreciate you spelling this out for us…nobody really seems to have read the tax bill (including the criminals that voted in favor of it). Thank you!
I am the owner of a regional production company. All of our “in-house” employees are union (IATSE local 21) and the majority of our over hire i thru the local as well, and they are also paid as employees. However, we do use some independent contractors, almost always techs, as needed. (with the IA’s blessing) Which is why I feel qualified to say the following:
Watch yourself and follow the advice of a tax expert if you are going to work as an independent contractor. The laws and regulations vary from state to state, but in many cases, to truly be “independent” you need to meet certain criteria, or a combination thereof. Carry workman’s comp insurance. Be registered with your state as at least a sole proprietor. Be able to show that a large majority of income is not from a single source. (For example, do you play at the same venue, or for the same promoter, nearly every night?)
It doesn’t even need to be you that gets popped initially. If the company that you are “contracting” from gets audited (usually by the state, not the feds), they will be asked to show records on who are employees and who are contractors. If the employer has no basis to prove that you are a contractor, other than that they issued you 1099m and gave you a gross paycheck, the auditor is heading your way next.
Again, I am by no means an expert in tax law, I speak only from the experience of a small business owner in the music industry. The only 100% sound advice to take from what I have written is again, talk to a tax expert. The last thing you need is penalties and interest on top of what an auditor considers to be unpaid workman’s comp payments from 7 years ago….
Hi. What if you get mostly 1099?
You will still be able to apply business expenses on your schedule C for 1099 and self-employment income. That’s the good news!
I am in sales and required to be paid by W2. I have many expenses such as advertising, licensing, software, cell phone, business lunches and dinners, etc. that I will no longer be able to deduct from my tax returns under the new tax bill. This will have a major impact on my family. I don’t know if there is anything we can do at this point but call our congress and urge them to allow us to continue to deduct these expenses.
I am seeing a huge overhaul for what can be very little difference. Please remember that Schedule C losses are circumspect. And there are rules about losses with SCorps as well. We could be pleasantly surprised with the lower taxes for next year…. but these rates are still s unsettled… just like a balloon mortgage.
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I don’t understand how this works with people who are employees (musicians, actors & sports players) who don’t earn enough $ to incorporate (upwards of $70,000 steady – annually was used as a guide to incorporate). These employees pay up to 25% to their team. For me it’s 15% to manager + 10% to agent. That makes a BIG difference in net taxable income. Changing the standard deduction does not make up for this. Doesn’t even account for union dues, job hunting, classes, travel, etc required in these types of industries. In addition, the employee gets taxed, without a write off. Then the agents and managers get taxed on the same amount That’s double taxation and then they get write offs because they are businesses. Can you file a schedule C without any 1099 income?
I had a question about In Kind donations, say you couldn’t afford to purchase all your equipment by the Dec 2017 deadline and instead recently purchased some sound equipment. Is it possible for performers to In Kind a portion of a performance fee allocating it towards providing sound? My band charges a flat rate for performance with sound included (which we are reconsidering due to this tax law) our future contracts would state that we would donate our PA expenses unless the venue pays for it itself… Is this a feasible option or cause any red flags come tax season?