Estimated Tax Payments For Musicians

The IRS requires that tax payers make timely tax payments, which for many self-employed musicians, including 1099s, means having to make quarterly estimated tax payments throughout the year. Otherwise, you could be subject to penalties for the underpayment of taxes, even if you pay the whole sum in April. The rules for underpayment apply to all taxpayers, but if you are a W-2 employee, you could just adjust your payroll withholding and not need to make quarterly payments.

If your tax liability is more than $1,000 for the year, the IRS will consider you to have underpaid if the taxes withheld during the year are less than the smaller of:

1. 90% of your total taxes dues (including self-employment taxes, capital gains, etc.), OR
2. 100% of the previous year’s taxes paid.

However, for musicians with an adjusted gross income over $150,000 (or $75,000 if married filing separately), the threshold for #2 is 110% of the previous year’s taxes. Additionally, the IRS considers this on a quarterly basis: 22.5% per quarter for #1, and 25% per quarter for #2, or 27.5% if your income exceeds $150,000.

Many self-employed musicians will find it sufficient to make four equal payments throughout the year. If that’s the case, your deadlines are generally April 15, June 15, September 15, and January 15. However, if your income varies substantially from quarter to quarter, or if your actual income ends up being lower than the previous year, you may want to adjust your quarterly estimated payments to reflect those changes.

You can estimate your quarterly tax payments using IRS form 1040-ES. Of course, your CPA or tax software should automatically be letting you know if you need to make estimated tax payments for the following year. You can mail in a check each quarter, or you may find it more convenient to make the payment electronically, via IRS.gov/payments.  For full information on quarterly estimated payments, see IRS Publication 505 Tax Withholding and Estimated Tax.

Estimated payments will fulfill the requirement of 100% of last years payment, or 90% of this year’s payment if that figure is lower. However, estimated payments are not designed to cover 100% of the current tax bill, so if your income is significantly higher this year, you could potentially owe a lot of taxes in April even after making quarterly estimated payments.

If you’re a self-employed musician, you don’t need to be a tax expert, but you do need to understand some basics and to make sure you are getting good advice. When you aren’t being paid as a W-2 employee, it is up to you to make sure you are setting money aside and making those tax payments throughout the year, so that next April you aren’t facing penalties on top of having a large, unexpected tax bill.

20% Pass Through Deduction for Musicians

You’ve probably heard about the new 20% tax deduction for “Pass Through” entities under the  Tax Cuts and Jobs Act (TCJA), and have wondered if musicians qualify. For those who are self-employed (1099, not W-2) here are five frequently asked questions:

1. Do I have to form a corporation in order to qualify for this benefit?
No. The good news is that you simply need to have Schedule C income, whether you are a sole proprietor (including 1099 independent contractor), or an LLC, Partnership, or S-Corporation.

2. How does it work?
If you report your music earnings on Schedule C, your Qualified Business Income (QBI) may be eligible for this deduction of 20%, meaning that only 80% of your net income will be taxable. Only business income – and not investment income – will qualify for the deduction. Although we call this a deduction, please note that you do not have to “itemize”, the QBI deduction is a new type of below the line deduction to your taxable income. The deduction starts in the 2018 tax year; 2017 is under the old rules.

There are some restrictions on the deduction. For example, your deduction is limited to 20% of QBI or 20% of your household’s taxable ordinary income (i.e. after standard/itemized deductions and excluding capital gains), whichever is less. If 100% of your taxable income was considered QBI, your deduction might be for less than 20% of QBI. If you are owner of a S-corp, you will be expected to pay yourself an appropriate salary, and that income will not be eligible for the QBI. If you have guaranteed draws as an LLC, that income would also be excluded from the QBI deduction.

3. What is the Service business restriction?
In order to prevent a lot of doctors, lawyers, and other high earners from quitting as employees and coming back as contractors to claim the deduction, Congress excluded from this deduction “Specified Service Businesses”, which includes not only health, law, accounting, financial services, athletics, and consulting, but also performing arts. High earning self-employed people in one of these professions will not be eligible for the 20% deduction.

4. Who is considered a high earner under the Specified Service restrictions?
If you are a performing artist and your taxable income is below $157,500 single or $315,000 married, you are eligible for the full 20% deduction. The QBI deduction will then phaseout for income above these levels over the next $50,000 single or $100,000 married. Musicians making above $207,500 single or $415,000 married are excluded completely from the 20% QBI deduction. Please note that these amounts refer to your total household income, not the amount of QBI income.

5. Should I try to change my W-2 job into a 1099 job?
First of all, that may be impossible. Each employer is charged with correctly determining your status as an employee or independent contractor. These are not simply interchangeable categories. The IRS has a list of characteristics for being an employee versus an independent contractor. Primarily, if an employer is able to dictate how you do your work, then you are an employee. It would not be appropriate for an orchestra, university, or contractor, to list one worker as a W-2 and someone else doing the similar work as a 1099.

Second, as a W-2 employee, you have many benefits. Your employer pays half of your Social Security and Medicare payroll tax (half is 7.65%). You might think that 20% is more than 7.65%, but remember that a 20% deduction in taxable income in the 24% tax bracket only saves you 4.8% in tax. That’s less than the value of having your employer pay their 7.65% of the payroll tax.

Employees may be eligible for other benefits including health insurance, vacation, state unemployment benefits, workers comp for injuries, and most importantly, the right to unionize. The Lancaster Symphony spent eight years in court, unsuccessfully trying to assert that musicians were not employees, to prevent them from unionizing. You would have a lot to lose by not being an employee, so I am not recommending anyone try to change their employment status.

Still, I expect many of you have Schedule C income from teaching private lessons, playing weddings, or other one-time gigs. If you do have self-employment income, you should benefit from the new tax law as long as you are under the income levels listed above. If you do other related work in music – publishing, repairing instruments, making accessories, etc. – that income might not be considered a Specified Service, so be sure to talk with your tax advisor about your individual situation. We will continue to study this area looking for ways to help musicians like you take advantage of every benefit you can legally obtain.

Musicians, Reduce Your Taxes Without Itemizing

If you used to itemize your tax deductions, chances are you will not be able to do so in 2018 under the new Tax Cuts and Jobs Act (TCJA). While it sounds good that the standard deduction has been increased to $12,000 single and $24,000 married, many musicians are lamenting that they no longer can deduct many expenses from their taxes. (See Tax Bill Passes, Strategies for Musicians.)

As a reminder, these changes impact W-2 employees. Musicians who are self-employed or “1099” can continue to deduct business expenses on Schedule C, as well as take the standard deduction. However, for any taxpayer who used to itemize on Schedule A, we’ve lost the following deductions in 2018:

  • Miscellaneous Itemized Deductions, including all unreimbursed employee expenses, tax preparation fees, moving expenses for work, and investment management fees. W-2 musicians have lost the ability to deduct instruments, equipment and supplies, concert clothes, mileage, home office expenses, union dues, etc.
  • Interest payments on a Home Equity Loan
  • Property Tax and other state and local taxes are now capped at $10,000 towards your itemized deductions.

For a married couple, even if you have the full $10,000 in property tax expenses, you will need another $14,000 in mortgage interest and/or charitable donations before you reach the $24,000 standard deduction amount. If you do have $25,000 in deductible expenses, you would effectively be getting only $1,000 more in deductions than someone who spent zero. And that $24,000 hurdle makes it a lot less attractive to try to maximize your itemized deductions any more.

Under the new law, people are no longer going to be able to say “it’s a great tax deduction” when buying an expensive home. When you take the standard deduction, you’re not getting any tax benefit from being a homeowner or having a mortgage.

So if you’ve lost your itemized tax deductions for 2018, can you you do anything to reduce your taxes? Thankfully, the answer is yes. I’m going to share with you 9 “above the line deductions” and Tax Credits you can use to lower your tax bill going forward.

Above The Line Deductions reduce your taxable income without having to itemize on Schedule A. All of these savings can be taken in addition to the standard deduction.

1. Increase your contributions to your 401(k)/403(b) or employer retirement plan. For 2018, the contribution limits are increased to $18,500 and for those over age 50, $24,500. What a great way to build your net worth and make automatic investments towards your future.

2. Many people who think they are maximizing their 401(k) contributions don’t realize they or their spouse may be eligible for other retirement contributions. If you have any 1099 or self-employment income, you may be eligible to fund a SEP-IRA in addition to a 401(k) at your W-2 job. Spouses can be eligible for their own IRA contribution, even if they do not work outside of the home.

3. Health Savings Accounts are unique as the only account type where you make a pre-tax contribution and also get a tax-free withdrawal for qualified expenses. You can contribute to an HSA if you are enrolled in an eligible High Deductible Health Plan. There are no income restrictions on an HSA. For 2018, singles can contribute $3,450 to an HSA and those with a family plan can contribute $6,900. If you are 55 and over, you can make an additional $1,000 catch-up contribution.

4. Flexible Spending Accounts (FSAs) or “cafeteria plans” can be used for expenses such as child care or medical expenses. These are often use it or lose it benefits, unlike an HSA, so plan ahead carefully. If your employer offers an FSA, participating will lower your taxable income.

5. The Student Loan Interest deduction remains an above-the-line deduction. This offers up to a $2,500 deduction for qualifying student loan interest payments, for those with an AGI below $65,000 single or $130,000 married filing jointly. This was removed from early versions of the TCJA but made it back into the final version.

Tax deductions reduce your taxable income, but Tax Credits are better because they reduce the amount of tax you owe. For example, if you are in the 24% tax bracket, a $1,000 deduction and a $240 Tax Credit would both reduce your taxes by $240.

Tax Credits should be automatically applied by your CPA or tax software. For example, if you have children, you should get the Child Tax Credit, if eligible. (Since it’s only February, there is still time to make a child for a 2018 tax credit!) If you are low income, still file a return, because you might qualify for the Earned Income Tax Credit. But there are other tax credits where you might be eligible based on your actions during the year. Here are four Tax Credits:

6. The Saver’s Tax Credit helps lower income workers fund a retirement account such as an IRA. For 2018, the Savers Tax Credit is available to singles with income below $31,500 and married couples under $63,000. The credit ranges from 10% to 50% of your retirement contribution of up to $2,000. Note for married couples, if you qualify for the credit, it would be better to put $2,000 in both of your IRAs, and receive two credits, versus putting $4,000 in one IRA and only getting one credit. If you have a child over 18, who is not a dependent and not a full-time student, maybe you can help them fund a Roth IRA and they can get this Tax Credit. Read the details in my article The Saver’s Tax Credit.

7. Originally cut out of the House bill, the $7,500 Tax Credit for the purchase of an electric or plug-in hybrid vehicle was reinstated in the final version of the TCJA signed into law. The credit is phased out after each manufacturer hits 200,000 vehicles sold, so if you were planning to add your name to the 450,000 people on the waitlist for a Tesla Model 3, forget about the Tax Credit. But there are many other cars and SUVs eligible for the credit which you can buy right now. There are no income limits on this credit, but please note that this one is not refundable. That means it can reduce your tax liability to zero, but you will not get a refund beyond zero. For example, if your total taxes owed is $5,200, you could get back $5,200, but not the full $7,500.

8. Child and Dependent Care Tax Credit. To help parents who work pay for daycare for a child under 13, you can claim a credit based on expenses of $3,000 (one child) or $6,000 (two or more children). Depending on your income, this is either a 20% or 35% credit, but there is no income cap.

9. New for 2018: The $500 Non-Child Dependent Tax Credit. If you have a dependent who does not qualify for the Child Tax Credit, such as an elderly parent or disabled adult child, you are now eligible for a $500 credit from 2018 through 2025.

Even with the loss of many itemized deductions, you may still be able to reduce your tax bill with these nine above the line deductions and Tax Credits. We want to help professional musicians find Financial Security, whether that is through long-term, diversified investment strategies, by teaching you how to save on taxes, or making sure you can afford to maintain your lifestyle in retirement. If you want an advisor who is knowledgeable about your unique financial needs as a musician, let’s talk about what our program can do for you.

Bonus Depreciation for Self-Employed Musicians

We’ve written extensively about the loss of tax deductions for W-2 musicians under the new Tax Cuts and Jobs Act (TCJA). For self-employed musicians, however, there are some changes for 2018 which may benefit you if you are an Independent Contractor (1099), Sole Proprietor, or have formed an LLC or Corporation. Specifically, Section 179 has been expanded, which enables business owners to expense certain items (take an immediate tax deduction) instead of depreciating those purchases over a longer number of years.

Section 179 has existed for many years, but Congress has continually changed the rules, setting caps on how much you can deduct. At the start of 2017, you could only take bonus depreciation of up to 50%. Under the TCJA, for 2018, bonus depreciation is increased to 100%, the cap increased from $520,000 to $1 million, and now you can also purchase used equipment and receive bonus depreciation.

As a self-employed musician, Section 179 can help you deduct:

  • Equipment for the business, such as musical instruments, sound gear, or accessories
  • Office furniture and office equipment
  • Computers and off the shelf software
  • Business vehicles with a Gross Vehicle Weight Rating (GVWR) of over 6000 pounds

You cannot use Section 179 to deduct the costs of real estate (land, buildings, or improvements), for passenger cars or vehicles under 6000 GVWR, or for property used outside of the United States.

One of the most attractive benefits of Section 179 is the ability to deduct a vehicle for your business. Under Section 179, your first year deduction on a 6000 GVWR vehicle is limited to $25,000. You would first deduct this amount. Second, you are eligible for Bonus Depreciation, which used to be 50%, but now is 100%. That means that a self-employed musician can effectively deduct 100% of any qualifying vehicle in 2018, even if it is a $95,000 Range Rover.

To be deductible, you must use the vehicle for business at least 51% of the time. If you also use the vehicle for personal use, you may only deduct the portion of your expenses attributable to the percentage of business miles. The way to maximize your Section 179 deduction, is to use the vehicle 100% of the time for your business. If the IRS sees you claim 100% business miles on your tax return, you had better have another vehicle for personal use. You might use your spouse’s vehicle, or perhaps keep your old vehicle, for personal miles.

Don’t forget that commuting between home and the office are considered personal miles, not business miles. This works best if your primary office is at home and all of your concerts, gigs, or teaching, are self-employed or 1099. If you are self-employed, then any driving to rehearsals, performances, teaching, business meetings, auditions, etc., would be business miles.

The 6000 pound GVWR requirement doesn’t mean that the vehicle literally weighs over 6000 pounds, but has a total load rating (vehicle, passengers, cargo) over this weight. If a manufacturer lists the weight of the vehicle, that is not the GVWR; the GVWR is often 1500 or more pounds higher than the vehicle weight. Make sure you are looking specifically at the official GVWR. You can generally find the GVWR printed on a sticker in the driver’s door frame to confirm.

The list of qualifying vehicles varies from year to year and from model to model, but includes most full-size trucks, vans, and SUVs. Be careful – sometimes a 4WD model is over 6000, but the 2WD version is not. On one SUV, a model with 3rd row seating was over 6000, but without the extra seats, it was under 6000. An another SUV, 2016 models were over 6000 GVWR, but the new and lighter 2017 model was not.

There are many lists on the internet of which vehicles qualify; in addition to full-size pick-up trucks and vans, most large SUVs such as a Tahoe, Suburban, Expedition, or Escalade are also above 6000 GVWR. Several mini-vans qualify (Honda Odyssey, Dodge Grand Caravan), as do some more medium size SUVs (Jeep Grand Cherokee, Toyota 4Runner, Audi Q7, BMW X5, Ford Explorer). Again, be absolutely certain your vehicle will qualify before making a purchase. One of the nice things about the new law is that now you do not need to buy a new vehicle to qualify for bonus depreciation; used vehicles are also eligible.

Please discuss this with your tax preparer. You cannot deduct more than you earned, so don’t buy a $50,000 SUV if you only show $30,000 in net profits. Similarly, you might be able to now deduct a $100,000 violin, but if you don’t have $100,000 in self-employment income, you might be better off depreciating the instrument over several years. Lastly, consider these caveats:

  • You have a choice between taking the “standard mileage rate” of 54.5 cent/mile for 2018, or using the “actual cost” method. When you take the standard rate, that already includes depreciation. If you use Section 179 to purchase a vehicle, you are going to be locked in to using “actual costs” for the life of that vehicle. You cannot take the Section 179 deduction upfront and later switch the standard mileage rate.
  • If you are using “actual costs”, you can also deduct your other operating expenses such as gasoline, oil changes, maintenance/repairs, insurance, tolls, and parking, but will need to document your costs. Keep those receipts!
  • You may still be required to keep a mileage log (“contemporaneous record” in IRS terms) to prove you are using the vehicle for more than 50% business miles. If business use falls below 50%, you may be required to pay back some of the depreciation. Let’s just say that would be expensive and a headache.
  • If you depreciate 100% of the cost of the vehicle upfront, that will reduce your cost basis to zero. When you sell the vehicle, you may be creating a taxable gain.
  • You may be able to finance a vehicle and still claim an upfront deduction under the Section 179 rules.

Under the TCJA, these expansions to Section 179 are temporary through 2022; after that time, bonus depreciation will be phased back down from 100% to 0%. So if you want to buy an SUV or truck, you have a five-year window to take advantage of this full depreciation.

This tax deduction is especially effective if you have a banner year of high income and anticipate being in a higher tax bracket, because it will let you accelerate future depreciation on a vehicle into the current year, provided the vehicle is purchased and placed into service that year. Please remember that this section 179 deduction is available only to the self-employed and not to W-2 employees.

I feel I should point out that driving a large SUV or truck may not always be the most cost effective decision. I am not suggesting everyone rush out and buy a Suburban just to get a tax deduction. But if you were thinking about buying a vehicle this year, it can certainly help to know about this tax deduction. And it might influence which vehicle you choose to buy!

I see a lot of musicians who keep good records and find out after the fact which expenses they can deduct. But I don’t see a lot of musicians who are proactively making business decisions to maximize their economic benefit. If you’re going to need a vehicle to haul your drums, or harp, amps, or even just yourself, why not choose one where you can potentially deduct the full cost of the vehicle? With the high costs of operation, insurance, and depreciation of any vehicle, I think there are a lot of musicians who would benefit from an actual cost approach, rather than tracking miles using the standard mileage rate. If your musical life involves a lot of windshield time, know your options.

Tax Bill Passes; Strategies for Musicians

Two 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 take itemized deductions on Schedule A against their W-2 income. For 1099 income or self-employment income reported on Schedule C, there will be little or no change in claiming those business expenses.

While there have been many last minute changes to the version passed in the Senate, I am sad to report that all of concerns which I have for my clients (and myself) have made it into the final version passed at 1:51 AM in Washington. The last step will be for a committee to reconcile the House and Senate bills into a final version to be signed by President Trump. They will begin work on the process on Monday.

The bill applies to your 2018 tax year, so your 2017 tax return (due April 15, 2018) is still under the old rules. Here is an overview of significant changes which will be relevant to musicians as you prepare your taxes.

  1. The Senate version keeps our current seven bracket structure, but lowers everyone’s marginal tax rate by a percent or two. The current brackets of 10, 15, 25, 28, 33, 35, and 39.6 percent will become 10, 12, 22, 24, 32, 34, and 38.5 percent. Additionally, the income levels for these brackets are increased at the high end. The income brackets will be linked to inflation, but the IRS will use chained CPI, which will likely have a lower growth rate than the current method of calculating CPI. Most significantly, the lower tax brackets have a sunset after 2025 at which time, the higher rates return. (Note that the corporate tax reduction from 35% to 20% is permanent. That will have to be a conversation for another day!)
  2. The Standard Deduction will increase from $6,350 single ($12,700 married) to $12,000 single ($24,000 married). However, the personal exemption of $4,050 is eliminated. So the net change is only from $10,400 to $12,000 single, or $20,800 to $24,000 for a married couple. Additionally, since the personal exemption applies to dependents, a family of four would actually see their standard deduction and personal exemptions drop from $28,900 to $24,000. Offsetting this is the child tax credit, which will increase from $1,000 to $2,000 in the Senate bill. The additional $1,000 increase under the Senate plan will be non-refundable, meaning it can reduce your tax liability to zero but will not be paid back.
  3. With a higher standard deduction, it will be more difficult for musicians to have enough itemized deductions to claim a tax deduction. As a reminder, itemized deductions currently include state and local income, sales, and property taxes, mortgage interest, charitable donations, and miscellaneous itemized deductions such as unreimbursed employee expenses.
  4. The Senate Bill eliminates the tax deduction for state and local income and sales taxes and caps the property tax deduction to $10,000. Starting in 2018, you will no longer be able to deduct home equity loans or interest on a second home. Another change: in order to receive the capital gains exclusion on the sale of your home, you must have had the house serve as your primary residence for 5 of the past 8 years. (An increase from 2 of the past 5 years.)
  5. Also eliminated are the Miscellaneous Itemized Deductions. This is on page 83 of the Senate Bill. This category includes unreimbursed employee expenses which are very significant to many musicians. You will no longer be able to claim the following as itemized deductions: tools and supplies, required clothing, home office expenses, mileage and travel, union dues or professional organization dues. Again, this applies to your expenses in generating W-2 income and not to 1099 income. It is essential to know how you are paid.
  6. The Senate version increased the above-the-line deduction for teacher classroom expenses from $250 to $500. This was eliminated in the House bill, to universal outrage. You do not have to itemize to take this deduction. Let’s hope this makes it into the final bill.
  7. There are many other changes to Alternative Minimum Tax, the Estate Tax, the individual mandate of the ACA, pass-through entities, and allowing 529 Plans to pay for private and religious schools for K-12. The student loan interest deduction is eliminated. We’re aware of these changes and others and are happy to discuss those on an individual basis.

While I cannot provide personal tax advice to non-clients, I can make some general recommendations you may want to consider for your own tax situation.

If you currently itemize, you may want to accelerate as many of your deductions into 2017. Before December 31, consider:

  • Paying your property taxes. Next year, you will be capped to $10,000. But even if you are below $10,000, only your itemized deductions above $24,000 will net you any additional tax savings versus the standard deduction. Will you have more than $24,000 in itemized deductions in 2018? It will be more difficult under the new rules.
  • If you have unreimbursed employee expenses, you might want to make those purchases in 2017: concert clothes, sheet music, tools and supplies, or musical instruments. Buy your plane tickets now for 2018 travel. Pay your dues and subscriptions. Remember that to count as a 2017 expense, you just have to put these on a credit card by December 31.
  • Making your charitable donations. If you are over age 70 1/2, you really have to look into doing a Qualified Charitable Donation from your IRA rather than trying to deduct a charitable donation.
  • Reviewing your sources of 1099 /  Schedule C income. If you have both W-2 and 1099 income, you will want to tie your expenses to your Schedule C business expenses instead of Schedule A itemized deductions starting in 2018. If you are primarily W-2, having some 1099 gigs may allow you to claim expenses which will otherwise be lost.

As a musician and the spouse of a musician, I have spent hundreds of hours in keeping receipts and detailed records of expenses which will no longer be tax deductible for us. It’s frustrating, and I believe our taxes will be higher in 2018 as a result. Being a musician is already a challenging way to make a living and this change will complicate things further for many of us.

Musicians want financial security and we can help you achieve those goals. If you’re ready to have a financial plan that is specific to your life and needs, please contact me and we can discuss how we work with musicians.

As an aside, I’d like to applaud Senator Bob Corker who was the sole Republican to vote against the Bill, because it will increase deficits by $1 trillion over the next decade. Corker – who is retiring and not running for re-election – was the only Senator who did not vote along party lines. The Bill passed 51-49. Interesting times, indeed.

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.

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.

The Musician’s Guide to Mileage, Part 2

Are you missing out on driving expenses you could be deducting from your taxes? In Part 1 of this series, we differentiated between commuting and types of travel which are tax deductible for professional musicians. Now, in Part 2, we will consider which will maximize your tax deduction: using the IRS Standard Mileage Rate or the Actual Cost method.

The Standard Mileage Rate is used most often by musicians because of its ease and simplicity. Each year, the IRS sets a rate which is supposed to reflect the current costs of driving a car. For 2016, the rate is 54 cents per mile. Is this a good rate or a bad rate? There’s no way to know the answer to that question, because it will vary from situation to situation and person to person. For some people 54 cents will be more than their actual costs. For many others, however, 54 cents doesn’t even come close to covering the actual costs you have in operating your car for business purposes.

The IRS doesn’t care which method you use, as long as you can document your expenses. In fact, in Publication 463 “Travel, Entertainment, Gift, and Car Expenses”, the IRS shares this tip: “If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.” But very few musicians actually bother to do this. Most just use the Standard Rate, which could be less than your actual costs by thousands of dollars a year.

The Actual Cost method means that you can deduct all of your car expenses, including not only gasoline, but also depreciation (if owned), lease payments (if leased), registration fees, oil changes, tires, repairs, insurance, garage rent, tolls, and parking costs. If you use your car for both personal and business use, than you will calculate the percentage of business miles to your total miles driven that year. If 80% of your miles are for business, then 80% of these actual costs are tax deductible.

Gas is almost never your largest expense as a car owner. At 25 mpg, driving 10,000 miles a year costs only $900 at today’s price of $2.25 for gas. You probably pay more for insurance than gas. Your largest expense is almost always depreciation. A car generally loses at least 50% of its value in 5 years, but the IRS may allow you to depreciate your vehicle even faster than this. I think a lot of tax payers are scared away from using the Actual Cost method because of the complexity of depreciation.

There are a number of depreciation methods that the IRS uses, including Modified Accelerated Cost Recovery System (MACRS), straight-line, and section 179. It’s beyond the scope of this article to define these, but suffice it to say that a CPA will understand these, and frankly, so will most tax software, and guide you to the correct method.

Your actual costs might look something like this:

  1. Depreciation $3050
  2. Insurance $1622
  3. Gasoline $900
  4. Registration $73
  5. Oil Changes $97
  6. Repairs $388
  7. Tolls $526

Total Actual Costs: $6,656. If you drove 10,000 business miles, then you could choose between a $5,400 deduction using the Standard Mileage Rate, or a $6,656 deduction using your Actual Costs. In this case, using the standard rate would mean that you missed out on $1,256 in additional deductions that you could have claimed.

In general, if you have high fixed costs like depreciation or insurance, and average or low miles, you will probably be better off with actual cost. The same is true for years when you have expensive repairs. The Standard Mileage Rate may be higher when you drive a ton of miles, or if your fixed and operating costs are low.

One of the most effective ways to use the Actual Cost method is by using one car exclusively for business, so you can deduct 100% of the costs. How to do this? If you are married or have a partner, and your spouse has also has a car, use that car for personal uses like getting groceries. This is important, because if you claim a vehicle is 100% used for business, one of the first things the IRS will ask you is if you have another vehicle available for personal use. And the answer had better be yes.

If you do end up using the Standard Mileage Rate, please note that you can also deduct any tolls and parking costs for your eligible business driving. A lot of musicians miss this one. Here in DFW, it seems like all the highway construction of the past 15 years has been to build toll roads, so we are paying tolls more frequently and in larger dollar amounts to get to gigs. Download your Tolltag statement, compare it to your datebook and highlight the trips you made for business each month. Or if you do use one car 100% for business, you can simply deduct all the tolls for that vehicle.

Lastly, if you are self-employed, you can deduct any interest you pay on a car loan, in the percentage of miles that you use the car for business. However, if you are a W-2 employee, you cannot deduct the interest, even if you use the car 100% for business.

There are a lot better uses for your hard earned money than paying taxes. That’s why I want musicians to use every available legal tax deduction to minimize your tax bill each year and keep more of your income in your pocket. Being a musician is a passion, but it also is a business, which means keeping good records and being smart about taking whatever tax deductions are allowed. The mileage deduction is a big one for many musicians.

Was this article helpful? I’d love to hear from you. What topics would you like to see in future articles? Email scott@goodlifewealth.com.