Tax Parity Act Would Help W-2 Musicians

In 2018, the Tax Cuts and Jobs Act (TCJA) eliminated Unreimbursed Employee Expenses as a tax deduction. For musicians who are W-2 employees, this meant we lost the ability to deduct expenses, often significant, like our instruments and equipment, concert clothes, repairs, a home office, travel for work, study, or auditions, and even Union dues.

There is a new bi-partisan Bill in the House of Representatives which would restore some of these deductions for Performing Artists, including musicians. First, this would not change the new TCJA definitions of what is an itemized deduction. Rather, the bill expands an old tax benefit from 1986 and would allow musicians (who are employees) to take an above-the-line deduction for employee related expenses.

The original 1986 version is called the Qualified Performing Artist (QPA) tax deduction and you probably never used it because you had to make less than $16,000 to be eligible. The 2019 Bill is called The Performing Artist Tax Parity Act (PATPA) and amends the old law by increasing the eligible income thresholds to $100,000 (single, with a phaseout to $120,000), and $200,000 (married filing jointly, with a phaseout to $240,000). These income limits would be indexed for inflation. If you make below those amounts you would be eligible for the deduction.

Back in May, I was asked to comment on a draft version of this Bill, before it was made public. I am glad to see that the Bill has been officially introduced as H.R. 3121 (text here).

Important considerations:

1. The definition of Qualified Performing Artist requires that the individual have at least two W-2 employers. If someone only works for one employer, say the Fort Worth Symphony, then they wouldn’t qualify. But if they worked for the Symphony and had another W-2 job as a performing artist, then they could take the deduction. If their second job was teaching accounting, then no. 

If this is passed, it might become very valuable for a musician to play a show or church gig as a W-2 just so they could have a second job to qualify for this deduction! As long as you make at least $200 from an employer, it counts as a second employer and you become an eligible QPA deduction that year.

2. QPAs can only take this deduction if their expenses exceed 10% of their gross W-2 incomeas a performing artist. (Expenses incurred for 1099 work would still be subtracted on Schedule C.) It’s a high threshold, but it would help those musicians with significant expenses. It would also encourage stuffing expenses into one year rather than spreading them out over a number of years.

3. The expenses are deducted on IRS form 2106 under “qualified performing artist”. Here are the instructions for 2018: https://www.irs.gov/pub/irs-pdf/i2106.pdf

The PATPA deduction would allow W-2 musicians to reclaim many of the lost itemized deductions under the TCJA, including vehicle mileage, unreimbursed travel expenses, study, home office, and equipment, including musical instruments. This does not require itemizing your deductions – musicians could take the standard deduction and still take the QPA.

4. Some musicians would not be eligible for the QPA deduction if their income is above the limits. Prior to 2018, those musicians were probably able to use those expenses as itemized deductions; they won’t be helped by the new Bill. For musicians in expensive cities like NY or LA, they might make too much for this deduction, even though they also have a very high cost of living.

It’s too early to make plans as we don’t know if this Bill will become law. This Bill has bi-partisan support, introduced by Reps. Judy Chu (D-CA) and Vern Buchanan (R-FL), so we will see if it makes it. I hope it does. Presently it is under consideration in the House Ways and Means Committee. I will keep you posted as new information becomes available.

Until then, if you have any financial planning questions or would like to discuss our financial planning services, please feel free to email me anytime.

Musicians, You’re About to Lose Your Tax Deductions

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.

  1. Consider paying your property taxes in December 2017 rather than January 2018
  2. Make your 2018 charitable donations in 2017
  3. If you have unreimbursed employee expenses, go ahead and purchase reed supplies, music, concert clothes, etc. before the end of 2017
  4. 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.
  5. 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.