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- The $7,500 tax credit for a plug-in electric vehicle will be repealed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.
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