7 Financial Tips for Professional Musicians

Just like a career in music, achieving prosperity is the product of years of planning, deliberate work, and making sound choices. Being a professional musician is different from other traditional careers and can pose a unique set of financial challenges. Here are seven ways professional musicians can improve their financial future:

  1. Think like an entrepreneur. You are dedicated to your art; be sure to not neglect your business, because you are indeed a business. What would a business owner do? Develop multiple sources of revenue (different gigs, styles, teaching, administration, etc.) to diversify your income stream and have the flexibility to change when opportunities arise or go away. Entrepreneurs don’t do everything themselves or try to know everything. They enlist professionals – financial planners, CPAs, attorneys – to make sure they are doing things right.
  2. Set Goals. The myth is that all musicians were born with a talent. The reality is that we’ve spent thousands of hours over many decades practicing, learning from masters (and colleagues), and competing to reach the highest levels of performance. If musicians spent even a small fraction of that energy on setting financial goals, taking steps to save, and educating themselves about money, they would be incredibly successful. Professional musicians are as driven and dedicated as Olympic athletes or chess champions. If we can apply that same process and focus to financial planning, the sky’s the limit. It doesn’t matter if you change your goals later on, the important thing is to get started today and not wait another year to start saving and planning for your future.
  3. Emergency Fund. The common rule of thumb is to keep 3-6 months of living expenses available in cash for emergencies. For musicians, I’d extend this to 6-12 months if you can. Your income can be highly variable, and if you can’t work, your income goes to zero. Read my top tips on How to Save More as a Musician.
  4. Be proactive to reduce taxes. The more money you keep, the more you have earned. Be organized with your receipts and records and aim to learn and improve your tax situation each year. Don’t wait until April to think about your deductions. If you have a dedicated practice room, be sure to use the home office deduction. Read The Musicians Guide to Mileage and Deducting Concert Clothes. If you have both salary (W-2) and self-employment (1099) income, try to deduct general expenses against your self-employment income on Schedule C. Take every opportunity to reduce your taxes. This takes some time, effort, and organization, but is well worth the effort.
  5. Think in terms of Assets and Liabilities. Grow your assets (investments, retirement accounts, cash, real estate) and have a plan to eliminate your liabilities (credit cards, student loans, mortgages, etc.). Aim to be debt free before retirement and get that stress out of your life. The earlier you start a retirement plan, the more you will have at retirement age. Read The Musician’s Guide to Choosing a Retirement Plan.
  6. Don’t skip insurance. I know a lot of musicians who are uninsured or under-insured. Don’t forgo health insurance at any age. Make sure you have coverage for home and auto that will actually protect you. If you can get a disability policy, make sure it covers “own occupation” (being a musician) and not “any occupation”. If other members of your family are dependent on your income, you need a life insurance policy. I recommend term insurance for 95% of the people I meet. Learn about Umbrella Policies.
  7. Be a good colleague. Working musicians know that their livelihood depends not just on their skills, but on their relationships with other musicians. Being easy to work with is essential to getting called back, being recommended for other gigs, being granted tenure, and maybe even winning a job or audition. A positive attitude is a tremendous asset in a field which is competitive, high pressure, and full of challenges. Be someone that you’d want to be around. Optimists are going to be more successful as musicians, as well as with their finances.

If you want to discuss what steps to take with your finances, you don’t have to go it alone. Give me a call and let’s talk about what you want to achieve.

AFM Pension Plan Slide Continues

Participants in the AFM Employers’ Pension Fund (AFM-EPF) received the annual funding notice and notice of critical status this week. Unfortunately, this year’s report is not good, and this notice does little to explain why.

Each year, pension administrators are required to evaluate their plan’s “funded percentage” as a measure of the plan’s financial capacity. The funded percentage is the actuarial value of the plan’s assets divided by the actuarial value of its liabilities. A funded percentage of 100% or higher would indicate a fully funded plan. Our plan has been in critical status since 2010, as have many plans, following the crash of 2008-2009 which greatly impacted asset values.

Two years ago, the AFM-EPF, reported a funded percentage of 85.7%. This declined to 81.6% last year, and then to 76% this year, which means that the plan presently has only 76 cents for every dollar of future benefits promised. The funded percentage is based on “actuarial” values, which means that these numbers are actually adjusted to smooth out stock market fluctuations and to discount future benefits back to today’s dollars. Also alarming is a large decline is the actual, “fair market value” of assets.

The fair market value of plan assets sat at $1,823,000,326 as of 3/31/2014, and stayed fairly level over the following year, to $1,818,080,945 as of 3/31/2015. Over the past year, however, assets declined by $114 million to $1,703,971,000, a drop of over 6%. During the most recent plan year (April 1, 2015 to March 31, 2016), the S&P 500 Index delivered a total return of 1.78%, so this wasn’t due to a terrible stock market environment.

It is also worth noting that the fair market value of assets is substantially lower than the actuarial values. As of April 1, 2015 (the most recent value made public), the actuarial value of assets was listed as $2,066,699,976, or $248 million more than the fair market value. That is a quarter billion dollars in smoothing! Over time, as we get further away from 2009, this gap should narrow. The actuarial values should eventually decline towards the fair market values – meaning that the funded percentage is unlikely to improve significantly even if the market performs strongly next year.

Over this same time period, the actuarial value of liabilities has been steadily increasing, from $2.39 billion in 2013 to $2.46 billion in 2014 and $2.53 billion in 2015. Increasing liabilities and decreasing assets are why the funded percentage has worsened.

One of the most significant changes to the plan has been dramatic reduction in the Benefit Multiplier. Put bluntly: the current participants are going to receive less than one-quarter of the benefits promised to previous beneficiaries and are going to bear the pain of the rehabilitation plan, while older participants will still receive their full benefits. Over time, the lower Benefit Multiplier should help improve the funded percentage.

The Benefit Multiplier is used to calculate a monthly payment for each $100 that has been contributed to the plan in your name. The multipliers below are all for retirement at age 65, and contributions earned in the following dates:

  • Before 1/01/2004: $4.65
  • Between 1/01/2004 and 4/01/2007: $3.50
  • Between 4/01/2007 and 4/01/2009: $3.25
  • Between 4/01/2009 and 1/01/2010: $2.00
  • After 1/01/2010: $1.00

Over this time period, the monthly benefit fell from $4.65 per $100 contribution to $1.00. I have to admit, I am baffled how the old payout was ever going to work. Someone who had $100 in contributions in 2003 and retired in 2004 at age 65 would get $4.65 a month, or $55.80 a year for the rest of their life? From $100?

I studied Pension Accounting in the CFA Program, and I understand how these decisions were made. The assumptions are crucial decisions. They assume a rate of return, a number of new and retiring participants, wage and contribution growth, and even the life expectancy of the average beneficiary. Unfortunately, many of these assumptions have proved overly optimistic, not just for the AFM-EPF, but for many pension plans. The rate of return has been lower in stocks since 2000, and is going to be much lower in bonds, going forward. Participants are living longer than the mortality tables (created decades ago) predicted. Growth in contributions and inflation make what seems like high pension payments possible in the future. Unfortunately, employers in music – specifically orchestras and the recording industry – are not areas of high contribution growth either in the number of musicians employed or in covered wages.

The EPF created the Rehabilitation Plan in 2010, which the Actuaries originally thought would enable the plan to emerge from critical status by 2047. Today, they no longer believe that the rehabilitation plan will work, only that it should forestall insolvency for at least 20 years. Past 20 years, they say that it is difficult to predict. This is a troubling development, and it’s not information which was shared in the plan mailing. If you want to find this information, you have to go online and download the June 27, 2016 update to the Rehabilitation Plan. On page 9:

“Currently, Milliman does not project that the Plan will emerge from critical status. Accordingly, the objective of the Rehabilitation Plan is to take reasonable measures to forestall possible insolvency.”

What does all this mean to you?

  1. The plan remains in critical status, and may worsen. The plan actuaries now believe that the rehabilitation plan will not enable to the plan to emerge from critical status. The funded status would be even worse if they used the fair market value of assets rather than the actuarial value.
  2. The plan has already slashed benefits going forward, but may need to lower payouts further if they want to guarantee solvency.
  3. Each year that the funded ratio declines, we are closer to the eventual possibility that the plan will be taken over by the Federal Government, via the Pension Benefit Guarantee Corporation, or PBGC. Note that the PBGC provides a reduced benefit and has a maximum guarantee of $35.75 times the number of years of service. (For example, if you participated for 30 years, your maximum monthly benefit would be $1072.50, even if the AFM-EPF had planned to pay you $2,000 a month.)
  4. Even in the best case scenario, musicians who joined the plan since 2010 will receive a small fraction of the benefits paid to those who had earnings before 2004. Newer participants had better have other sources of retirement income.
  5. The conversation we are having now on the AFM-EPF, all Americans should be having about Social Security. It is also in jeopardy and will not work as originally designed. Benefits promised cannot be delivered. We must make changes, including lowering benefits, lifting the retirement age, and increasing personal savings.

I trust our AFM Leadership to take the steps to fix the EPF. As a multi-employer plan with contribution rates determined by hundreds of CBAs and union agreements throughout the country, increasing contributions further is not a feasible option. Getting the plan to be fully funded may require tough decisions about cutting benefits. If you are concerned about your retirement, whether it is next year or 35 years away, give me a call and we will create a plan for your needs and goals.

Emergency Assistance for Musicians

Today I am writing something which I hope none of you will ever need: financial assistance for musicians who experience an emergency. The most common need is for medical bills, which can easily run into the tens or even hundreds of thousands today for an accident, injury, or serious disease. The phrase “unexpected illness” is redundant – no one ever expects that they will be the one who experiences a life-threatening illness or injury. When these cause a financial crisis, there are three charitable organizations whose mission is specifically to help musicians in their time of need.

Even if this doesn’t apply to you, please read this, and keep these organizations in mind for your friends and colleagues. Every year, I hear about someone I know who plays in local groups, or who I went to school with, who is experiencing a financial emergency. Please let them know about these resources.

Musicians Foundation  http://www.musiciansfoundation.org/

Since 1914, the Musicians Foundation has provided emergency financial assistance for medical bills and living expenses for musicians who are unable to work due to emergency circumstances. To be eligible, you must have been a professional musician for at least 5 years and reside in the United States. To apply, they have a 4-page application and require tax documents, a letter, professional biography, and medical documentation.

Grammy.org MusiCares Emergency Financial Assistance  https://www.grammy.org/musicares/client-services/emergency-financial-assistance

Grammy’s Emergency Financial Assistance Program provides financial support for musicians in times of financial, medical, and personal crises. This includes hospital and medical bills, addiction recovery treatment, psychotherapy, Alzheimer’s care, as well as living expenses such as rent and utilities. To qualify, you need to document employment as a musician for at least five years and on six commercially released recordings or videos.

Sweet Relief Musicians Fund  http://sweetrelief.org/

Sweet Relief helps career musicians in the US and Canada with financial emergencies due to illness, disability, or age-related problems. Grants are provided to musicians who have regular public performances or performed or wrote music for at least three widely distributed recordings.

All three organizations accept and rely on donations to provide this financial support to musicians in need. So, if you are able, please consider making a donation on behalf of other musicians.

If you know a musician experiencing a health care and financial crisis, the last thing they may be thinking about is filling out forms, writing letters, and submitting financial paperwork. I will help any eligible musician complete these applications at no cost whatsoever. It’s a few hours of my time, but hopefully this can help them and their family in their moment of need.

The exorbitant cost of health insurance has been a frequent conversation this year. This month, I spoke with a healthy, young musician who is spending $450 a month for insurance, and a family of three with a premium over $1,200. As awful as that is, going without insurance is reckless. It is rolling the dice and hoping that you never get ill or have an accident. Please do not go without health insurance – you are risking everything. For moderate and low income families, make sure to investigate tax credits for insurance purchased through the Exchange, under the Affordable Care Act.

Link: IRS Facts about the Premium Tax Credit

How to Save More as a Musician

For many musicians, saving is a challenge. You may have multiple employers and gigs, but no guaranteed salary to create a consistent budget around. You may not know what work you will have in 6 to 12 months, let alone how much you will make or can save. Things can be much more unpredictable than for someone in a traditional job.

As a musician, you might not have a 401(k) with a company match or other benefits. Instead, you need to think like an entrepreneur and become responsible for creating your own savings plans.

Saving and investing is the path to financial independence. Even if you don’t want to retire, you should still aim for financial independence, so you can work because you want to and not because you have to. Saving isn’t just for retirement planning, it’s developing a plan for financial security to free you from worry today.

How can we make saving easier? What steps make you more likely to succeed?

1) Put your saving on autopilot through automatic monthly contributions. Whether it is establishing an emergency fund, contributing to an IRA, or creating a 529 college savings plan, making it automatic is the way to go.

2) Emergency Fund Triggers. Hopefully you already have an emergency fund with at least 3-6 months of living expenses. I know that musicians often need to tap into funds during the summer when their income drops with fewer gigs and students. Coordinate your saving with an emergency fund target: if your target is $12,000, anytime your account exceeds $12,500, sweep $500 from your emergency fund into an investment account. When you have busy months, you will have funds to invest more frequently.

Having trouble getting your emergency fund started? If you contribute to a Roth IRA, you can always access your contributions (but not any earnings), without tax or penalty. Hopefully, you will not have any emergencies and can leave the Roth account intact.

3) Set goals. If you don’t have a finish line – a target amount for your nest egg – it’s hard to feel any sense of urgency to saving. When I was 30, I knew where I wanted to be at 50, which also meant I could determine where I needed to be at 35, 40, and 45. Those specific goals have helped me stay on track through the years. Without long-term goals, short-term actions often lack direction and a clear purpose.

4) Think big, not small. How many times have you read that you can fund your IRA by giving up your daily coffee fix. Forget that! If you get the big decisions right, the small stuff takes care of itself. Instead, be very smart, calculating, and objective on two essential things: housing and cars. These are the biggest expenses for almost everyone, and we have tremendous discretion in choosing how much we spend on these two categories.

If you want to jump start your saving, take a close look at all your recurring monthly costs: insurance, utilities, cell phone, cable TV, and memberships. Comparison shop, look for savings, and drop items you don’t use or won’t miss.

5) Focus on maximum saving. There is an oft-repeated rule of thumb that you should save 10% of your income. I am guilty of saying this one, too, especially as a “realistic” goal for new savers. However, there is nothing magical about the number 10%, and there is no guarantee that if you start saving 10% today that you will have enough money to accomplish all your financial goals. Try to contribute the maximum to any employer retirement plans, which for a 403(b) or 401(k) means $18,000 or $24,000 if over age 50. And if you are also eligible for an IRA, fund a Traditional, Roth, or Backdoor Roth IRA. If you have self-employment or 1099 income, you may also be eligible for a SEP-IRA.

If it helps you to increase your saving, then let’s calculate each need separately and contribute to:

  • Employer retirement accounts
  • IRAs
  • Health Savings Accounts
  • 529 College Savings Plans
  • Term life insurance policy
  • Taxable brokerage account
  • Savings for a first or second home down payment
  • Savings for your next car, so you can pay cash when you need to replace your current vehicle

In other words, you have lots of reasons, needs, and ways to save!

Link: If your Adjusted Gross Income is below $30,750 (single) or $61,500 (married), you may be eligible for The Saver’s Tax Credit when you contribute to an IRA or other retirement account.

I know a lot of millionaires who were great savers and invested in generic, plain mutual funds. But I have yet to meet anyone who has turned $5,000 into a million through their brilliant investing. Investing decisions matter, but you are likely to reach your goals faster if you can figure out how to save 50% more rather than spending your time trying to increase your returns by 50%, because it is not possible over any meaningful measure of time.

Saving is the foundation of financial planning. It’s the first step which leads to many other good things. Unfortunately, it is also the most difficult step for most of us! But if you spent years practicing an instrument and studying in a conservatory, you already have the discipline, organization, and drive to be successful. It’s just a matter of applying that same process and curiosity to your finances!

Is Your Car Eligible for a $7,500 Tax Credit?

As a free-lance musician, I can think of many times when I have spent three hours or more in the car, round-trip, for a two and a half hour rehearsal. In most cases, our pay for a gig is fixed, so the only way to take home more money is to reduce our expenses.

If you are in the market for a fuel-efficient vehicle, you may want to know about a tax credit available for the purchase an electric or plug-in hybrid vehicle. Worth up to $7,500, the credit is not a tax deduction from your income, but a dollar for dollar reduction in your federal income tax liability. In other words, if your tax bill was $19,000 and you have a $7,500 credit, you will pay only $11,500 and get the rest back.

This credit has been available since 2010, but in the last two years a significant number of new car models have become eligible for the tax credit. If you drive a lot of miles, these cars may be worth a look.

The credit includes 100% electric vehicles like the Tesla Model S or the Nissan Leaf, and it applies to the newer plug-in hybrid models, including the BMW i3, Chevrolet Volt, Ford C-Max Energi, Hyundai Sonata Plug-In Hybrid, and others. The credit does not apply to all hybrid vehicles, only those with plug-in technology. While the plug-in cars may be more expensive than regular hybrids, they are often less expensive once you factor in the tax credit.

The amount of the credit varies depending on the battery in the car, and may be less than $7,500. The credit is phased out for each manufacturer after they hit 200,000 eligible vehicles sold, with the credit falling to 50% and then to 25%. So, for those 400,000 people who put down a deposit on the Tesla Model 3, most will not be getting the full $7,500 tax credit. Only purchases of new vehicles – not used – are eligible for the credit.

The program is under Internal Revenue Code 30D; you can find full information on the IRS website here. An easier-to-read primer on the program is available at www.fueleconomy.gov.

Some states also offer tax credits or vouchers for the purchase of a plug-in hybrid or electric vehicle. Unfortunately, Texas is not one of those states! You can search for your state’s programs on the US Department of Energy website, the Alternative Fuels Data Center.

Do you have a plug-in hybrid or electric vehicle? Send me a note and tell me how you like it.

Are Orchestra Musicians Independent Contractors?

Landmark court case says musicians are employees.

This spring, the U.S. Court of Appeals ruled that the musicians of the Lancaster Symphony were not independent contractors as the orchestra’s management asserted, but employees with the right to unionize. The musicians’ legal struggle took over eight years, but they eventually prevailed.

It is odd that you can work for one orchestra, have three rehearsals and a performance of Beethoven Five, and be considered an employee, and yet you could do the exact same thing for another orchestra and be considered an independent contractor. It doesn’t matter if an orchestra is full-time or per service, the work is the same.

Unfortunately, the IRS does not give a precise definition of what makes someone an independent contractor, but rather a list of characteristics to apply to each particular case. An employer, here orchestra management, will always prefer to have independent contractors for reasons I’ll explain below. The main argument that orchestras have for independent contractor status is that musicians provide their own instruments. But, the IRS says the key determinant is this:

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

Link: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined

I cannot imagine any conductor in the world who does not believe that their job is to control “what will be done and how it will be done.” Musicians are told what to do, when, what to wear, and how to act. You are not an independent contractor. If an employer really had any doubt as to a musicians’ status, they could file Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will review the facts in the case and make a determination. Since employers are not required to submit this form, most simply make a determination on their own.

There are a couple of important differences between being an independent contractor versus an employee.

  • Independent contractors receive a 1099, employees receive a W-2 at the end of the year. If you receive a 1099, you report your income and expenses on Schedule C; W-2 employees deduct unreimbursed expenses as an itemized deduction on Schedule A.
  • Independent contractors pay Self-Employment Tax, which basically means that they pay both halves of the Social Security and Medicare payroll taxes. If you are an employee, your employer pays one-half of the tax (7.65%), and you pay the other half. Even a per service orchestra likely has several hundred thousand dollars in payroll each year, so 7.65% is a significant expense.
  • Employees have a right to unionize.
  • Musicians who are employees might have a right to unemployment and worker’s comp benefits, depending on their state. Employers pay unemployment taxes if they have employees, but not for independent contractors.

As a musician, you are better off being an employee, a fact which caused the Lancaster Symphony management to spend eight years trying to overturn the decision of the National Labor Relations Board that determined that the musicians were in fact employees.

I play in a per service orchestra where musicians are considered independent contractors. I wanted to find out what this ruling meant to musicians who are independent contractors, so I contacted Harvey Mars, Esq., who is the counsel for AFM Local 802 in New York, and an expert in employment law for professional musicians. Mr. Mars recently wrote about the Lancaster ruling here.

FFM: Is the Lancaster Symphony ruling grounds to compel other per service orchestras to classify musicians as employees rather than independent contractors?

Mars: Yes, the ruling does establish a precedent and will be considered persuasive authority.

FFM: Do you foresee orchestras making this change voluntarily, or would the players or union need to pursue this on a case by case basis?

Mars: I believe this ruling may change some, but not all employer practices.

FFM: What are the benefits for musicians to be employees rather than independent contractors? (Ability to unionize, unemployment benefits, employment taxes?)

Mars: In addition to what you have, take advantage of statutes that only benefit  employees, such as civil rights statutes.  In New York we have City Laws that only apply to employees covering paid leave time.

The reality is that most orchestra musicians have always been closer to the definition of employee than independent contractor, but no one had ever challenged that status in court. Now we have a legal precedent to be considered employees, thanks to the Lancaster Symphony ruling. Similar per service orchestras should take note!

Musicians: Get Your Student Loans Forgiven In 10 Years

Many musicians work for a non-profit organization, such as an orchestra, opera company, chamber music group, or university. If you work full-time for a non-profit, you are eligible for the Public Service Loan Forgiveness (PSLF) Program. This program will forgive 100% of your eligible loans after you make 120 monthly payments.

Public service jobs include those with a federal, state, or local government agency or public school or library. Luckily for musicians, a full-time job with any 501(c)(3) non-profit organization is also considered a public service job, regardless of what the organization does. You must meet your employer’s definition of “full-time” or work at least 30 hours per week. If you work part-time positions, you can still use the program if you have multiple qualifying jobs that total at least 30 hours per week. If you are off summers, you still qualify, as long as you work 8 months per year and your employer still considers you employed over the summer.

Only loans received through the William D. Ford Federal Direct Loan Program eligible for the PSLF. However, if you have Perkins or FFEL loans, you may consolidate them into a Direct Consolidation Loan and then they will become eligible for the PSLF. Payments made prior to becoming a Direct Loan will not qualify. For other types of consolidation, be very careful – moving a Direct Loan into a bank loan could cause you to lose the opportunity to use the PSLF. Private loans are not eligible for the PSLF.

To qualify for the PSLF, you should use one of the federal income-drive repayment plans, including the Federal Income-Based Repayment (IBR) Plan, the Pay as You Earn Repayment Plan, or the Income-Contingent Repayment (ICR) Plan. The standard repayment plan also qualifies, but since that is a 10-year program, it would leave a zero balance after 120 payments. However, if you switch from the standard plan to one of the income-driven plans, you can still count your previous payments towards the PSLF.

I know a lot of musicians who make sacrifices to pay off their student loans in 10 years or less. If you work for a non-profit, I’d encourage you to use one of the income-driven plans instead, so you can become eligible for the PSLF. With the lower monthly payments, use the difference for other financial goals. Pay off your credit cards, build up your emergency fund, or contribute to an IRA. If the government is offering to forgive 100% of your remaining loan balance after 120 payments, you should send the smallest payment amount they will accept.

Payments made after October 1, 2007 may qualify for the PSLF. So if you’ve been making payments for 4 years, you may have only another 6 years to go! For further details on the program as well as instructions on how to verify and record your eligibility, please visit the Federal Student Aid Website. You will need to have each employer complete the Employment Certification Form to document proof of your eligibility. Although you are not required to submit the form until after 120 payments, it is recommended that you do so annually or whenever you change jobs, to make sure that your progress is being tracked.

Another great feature: the loan forgiveness you receive from the PSLF is non-taxable! Managing student loans has become one of the biggest hurdles today for people in their 20’s and 30’s. As a CFP(R) practitioner, I’m here to help you with all your financial goals and concerns, so if you thought I only do investments, I’d like to introduce you to the benefits of having your own financial plan.

12 Tips to Prepare for an Orchestra Lockout

If you’re a musician in an orchestra, a lockout may be among your worst fears. In 2012, the Minnesota Orchestra musicians were without pay for a devastating 15 months. Only after accepting a 15% pay cut did the orchestra return to work. Today, musicians in the Fort Worth Symphony are facing a stalemate in which management will not budge on draconian proposals to cut pay and benefits. Other groups have faced similar labor disputes and it is becoming increasingly commonplace for management to use brazen tactics to force musicians into accepting pay cuts and other concessions.

In light of this reality, orchestra musicians everywhere would be smart to plan ahead and take the financial steps below to ensure that they could survive a lockout of 15 months or longer. Here are 12 tips to put your personal finances on stronger footing:

  1. Know when your Collective Bargaining Agreement (CBA) is up for renewal. If your contract is up in the next year, conserve cash. Be careful about buying a car or making a major purchase if it means creating increased monthly expenses. Even if you think your orchestra has a good relationship with management, be cautious. Sometimes labor disputes can take a surprising turn, as my friends in Syracuse learned several years ago.
  2. Keep 6-12 months cash. The old rule of thumb was to have an emergency fund of 3-6 months of cash to cover your basic living expenses. Today, it may be more prudent to reserve 6-12 months of cash. This is tough to do – especially since you should continue to fund your retirement accounts – but when you’re in trouble, cash is king.
  3. Create a Budget. To calculate your emergency fund, you need to make a household budget and know how much you spend each month in both fixed and discretionary expenses. While you are evaluating your budget, look for ways to lower costs on recurring expenses such as cable TV, cell phones, insurance, and other monthly bills.
  4. Get ahead on your mortgage. If you send in extra principal payments on your mortgage (or other bills), you may want to stop. Instead, send in advanced payments, so you are several months ahead. Then if your pay is suspended, you will have a cushion of a couple of months before your next mortgage payment is due. This is especially helpful if you find that keeping a lot of cash on hand is a temptation to buy things!
  5. Pay off those credit cards. You cannot afford to be paying 20 to 30 percent interest on credit cards, especially if there is a possibility that your paycheck could vanish. I would say this takes priority over #2, keeping an emergency fund. In other words, go ahead and pay off your credit cards even if it means dipping into your cash significantly. Keep the credit cards open; they will be your source of emergency funds while you are rebuilding your cash account.
  6. Ask for an increase in your credit limits today. Maybe you’ve never exceeded $2,000 a month on your credit card, but having a $10,000 limit or higher could be helpful if you do end up locked out. If you wait until you are without a paycheck, when your income is zero, the credit card company is not going to increase your limits.
  7. If you have federal student loans, look into the Income Based Repayment Plan. This benefit is a good reason to not consolidate your loans into private bank loans. If your kids are in college, notify the school’s financial aid office immediately if your pay or employment changes. They may be able to increase your child’s need based financial aid.
  8. Research unemployment benefits, which vary by state. Here in Texas, you are eligible for unemployment if you are locked out, but not if you are on strike. New York is the only state that offers unemployment benefits to striking workers. If you are eligible, apply immediately for benefits. Link: Texas Workforce Commission: If You Are Involved in a Labor Dispute or Strike.
  9.  Supplement your income. Look for church gigs, weddings, private students, and other opportunities to moonlight and make some cash. While this is unlikely to replace your full orchestra salary, freelance gigs may go a long ways towards paying your monthly bills. Note that most unemployment benefits will continue if you have gigs, but will simply reduce the amount of your benefit in the weeks you receive income. If you can, try to schedule all your students on weeks you have gigs. You are better off having one huge week of income and three weeks of no income, rather than spreading that income over the course of the month. That way you can still receive unemployment benefits for the weeks you have zero income.
  10. Don’t dip into retirement accounts. If you take a withdrawal from your 403(B) or Traditional IRA before age 59 1/2, you will have to pay income tax on the withdrawal, plus a 10% penalty. You could lose as much as 35% to 50% to taxes and penalties, and that is just too costly. Plus, you are then sinking your future retirement and all the hard work that went into saving that money in the first place. Retirement accounts are creditor protected. Even if you were to face bankruptcy or foreclosure, you are not required to dip into your retirement accounts. Talk with an expert before ever taking a premature retirement distribution.
  11. Consider a Roth IRA. If you are struggling with prioritizing retirement accounts, building an emergency fund, and other needs, consider funding a Roth IRA. You can withdraw your contributions (but not any of the earnings), without tax or penalty, even if you are under age 59 1/2. For example, if you put in $5,000 to a Roth IRA, and it grows to $6,000, you can withdraw your original $5,000, tax and penalty-free. If you’re eligible for a Roth, it is a good tool to save for retirement, while still giving you the flexibility to use your money in case of an emergency.
  12. Health insurance. Take care of your annual physical, prescriptions, dental visits, eye exams, and any other health expenses while your insurance is in place. Budget for COBRA or look into an individual health plan, and make sure there is no gap in your being covered.

Hopefully, you will never find yourself locked out by your employer, but being prepared financially for such a situation should help you sleep better at night. Management knows that many musicians cannot afford to be without a paycheck for long and will use this threat at the bargaining table. I’ve been on a negotiating committee before and can tell you that things can get pretty ugly. The better prepared musicians are for the possibility of a strike or lockout, the stronger position you will have in negotiations to be taken seriously.

If you want to organize your finances and create a plan to accomplish your goals and address the risks you face, please give me a call or send me an email. I have a passion for the details of financial planning, but most of all, I love to help people. Thank you for reading! Best Regards, Scott

Deducting Concert Clothes

A professional musician’s purchase of concert clothing is a tax-deductible expense, but you need to make sure that you meet the IRS requirements for “uniforms” in order to ensure that the expense is allowable. The IRS has a two-part test to determine if work clothing is tax-deductible:

  1. You are required to wear the clothes as a condition of your job.
  2. The clothes are not suitable for everyday wear.

If you are a W-2 employee, you will deduct concert clothes on your Schedule A, under Miscellaneous Expenses, as an unreimbursed employee expense. This category of expenses is, unfortunately, subject to a 2% limit, meaning that only your expenses which exceed 2% of your adjusted gross income are eligible for the deduction. Luckily, the list of Miscellaneous Expenses subject to the 2% limit is large and includes other popular deductions, including professional dues, home office expenses, tools and supplies, travel for work, union dues, tax preparation fees, and investment management fees. So most musicians have little trouble breaking the 2% limit, although it still means that you don’t get any tax deduction on the first 2% of your expenses. If your AGI is $50,000, that is $1,000 in expenses that are not counted every year!

The IRS states that “Musicians and entertainers can deduct the cost of theatrical clothing and accessories that aren’t suitable for everyday wear.” Clearly, tails and tuxedos are not everyday wear, but other concert clothes for men and women, such as black pants or shoes, could be considered for everyday use. The IRS cautions that it is not enough that you do not wear your work clothes away from work; the requirement is that the clothes are “not suitable for taking the place of your everyday clothing.”

For details, see Miscellaneous Expenses, IRS Publication 529.

If you are paid as a 1099 (independent contractor), you can deduct your required concert clothes on Schedule C as a business expense, which is not subject to the 2% requirement. If you have both W-2 and 1099 gigs, you may be able to allocate your concert clothes as would be beneficial for your tax return, assuming both employers require the clothes.

In the event your tax return is audited, you should be able to provide documentation to support your deduction, including:

  • receipts describing the clothes purchased;
  • documents from your employer listing the required dress code;
  • you will need to say both that you do not wear the clothes at any time other than concerts AND that the clothing is not suitable for everyday use. I would suggest using the exact wording “not suitable”. While the IRS does not define “not suitable” in their instructions, that is the requirement.