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.
- 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!)
- 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.
- 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.
- 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.)
- 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.
- 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.
- 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.
15 replies on “Tax Bill Passes; Strategies for Musicians”
Thanks for the article! Accelerating deductions now could be a wash for some, if the AMT goes away next year. In my own case, for example, my 2% deductions, etc., get eaten up annually by AMT anyway.
AMT is an issue especially when you have substantial deductions! In the House version, AMT was eliminated. It was added back in the Senate, although slightly reduced, as a last minute compromise to appease budget concerns. We may continue to have an AMT system, unfortunately. My guess is that when they reconcile the House and Senate bills that the final version is closer to the Senate bill. Stay tuned!
Quick question here: you note the the miscellaneous itemized deductions are eliminated in the Senate bill (item 5). Are they not eliminated in the House bill? Thanks.
The miscellaneous deductions were eliminated in both the House and Senate versions.
Rather than the “woe is me” approach, starting an S-Corp or LLC solves the Schedule A problem. Both those pass-through shell structures are almost always better than than Schedule A/W2 structures. Musicians should implement that NOW and tax additional deductions un the corporate veil on their 2017 taxes, too. W2 income would simply be posted to the LLC or S SCorp.
I’m curious about this idea. How would it work for professor who is paid through a w2 but isn’t reimbursed by their college for travel costs or expenses they must accrue in order to maintain their employment?
I know a lot of people will be asking this, so I’m curious about whether they should start a business for these expenses and things and run any extra income they may make through this way.
This is correct. a 20% reduction of income and income tax is the result of the new tax bill on every musician who files a Sch C or is and LLC. This is why the tax bill is actually a great boon to the average musician.
I have heard the Medical expenses deduction is allowed in the Senate version. Is the threshold still at 7.5% of AGI? Also the individual mandate tax for the ACA is going away in the Senate version. Scott, can you confirm?
Hi Franklyn. Yes, the Senate version preserved the Medical Expenses tax deduction. The threshold is for expenses which exceed 10% of AGI. There has been a 7.5% limit for those age 65 and over since 2012, but that is supposed to sunset and everyone will be at 10%. The individual mandate under the ACA is repealed under both House and Senate versions, if I recall correctly. This would eliminate the penalty on individuals who do not obtain health insurance.
I work primarily with people in the arts, including dozens of professional musicians and I have to say I’m completely baffled at this idea that musicians are losing their tax deductions. A VAST majority of musicians are self-employed and will NO change in their ability to take their business expenses. I have NEVER done taxes for any band or musicians that are (primary) paid on a W2, and that is clearly what the author is talking about.
I don’t say any of this in any defense of this travesty of a tax bill, just to set the record straight.
Hi Peter, Musicians in ICSOM orchestras, universities, and most full-time church positions are W-2. I know thousands of W-2 musicians who are impacted by this change, including all of my wife’s colleagues at the Dallas Symphony and Southern Methodist University. Across town, it applies to musicians in the Fort Worth Symphony, Dallas Opera, and professors at the University of North Texas, Texas Christian University, and other schools. It will apply to hundreds of church organists, choir directors, and band directors. And that’s just here in my neck of the woods. Scary thing is, when I ask musicians which of their jobs are 1099 and which are W-2, half of them don’t know. It’s important that we make this knowledge accessible to the musicians who will be impacted.
Thanks for the update; I will be following this closely.
PS: Unfortunately, you may want to update/edit your remarks about Sen. Corker, google “Corker Kickback.” 🙁
Would filing as an LLC or S Corp not help, since business expenses can work towards lowering net income?
I’m also interested to know if, for a working DJ, vinyl records and equipment could be listed as assets, or would there be no benefit to this? DJ in mind has a fair value vinyl record collection of over $15k which he uses for his gigs.
Thanks! Great site, so glad I found this!
[…] 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 […]
[…] 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.) […]