Tax Tips for Musicians
Volume 117, No. 4April, 2017
Each year, as the tax season approaches, Allegro publishes these updated tax tips for musicians provided by Local 802’s accounting firm, Gould, Kobrick & Schlapp P.C.
OVERVIEW AND HIGHLIGHTS
The following outline focuses on important aspects of the tax law and those that specifically affect musicians. For additional information on deductions, exemptions or filing status, see a tax advisor or visit www.irs.gov. Here is a quick overview of some highlights.
In tax year 2016, the tax dollar brackets remain the same: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. The threshold for the top bracket of 39.6 percent has been adjusted for inflation and now applies if taxable income exceeds $415,050 for single taxpayers, $441,000 for heads of households, $466,950 for married filing jointly and qualifying widow/widowers, and $233,475 for married taxpayers filing separately.
Under the Individual Health Care Mandate, you are required to have minimum “essential health coverage” through an employer plan, a government plan or other plan. Otherwise, you must pay a penalty tax, unless you are exempt from this requirement. The penalty tax is called the shared responsibility payment and for 2016 it is the greater of: 2.5 percent of your household income above your filing threshold, or $695 per adult in your household and $347.50 per dependent child under age 18, to a maximum of $2,085. To be exempt from this penalty you must file Form 8965, the rules for which are extensive. To help those of modest means there is a Premium Tax Credit. This Premium Tax Credit – also known as PTC – is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. To get this credit, you must meet certain requirements and file a tax return. Eligibility depends on your household income and other factors.
For 2016, the tax rate on the employee portion of Social Security is 6.2 percent on wages up to $118,500, so Social Security tax withholdings should not exceed $7,347. Medicare tax remains at 1.45 percent and is withheld from all wages regardless of amount. “High income” workers, with wages and other compensation including net self-employment earnings in excess of $250,000 if married filing jointly, $125,000 if married filing separately, or $200,000 if single, head of house-hold or qualifying widow(er), are again subject to the 0.9 percent additional Medicare tax. This tax is calculated on Form 8959.
On Schedule SE for 2016, self-employment tax of 15.3 percent applies to earnings of up to $118,500 after the earnings are reduced by 7.65 percent. The 15.3 percent rate equals 12.4 percent for Social Security (6.2 percent employee share and 6.2 percent employer share) plus 2.9 percent for Medicare. If net earnings exceed $118,500, the 2.9 percent Medicare rate applies to the entire amount. One-half of the self-employment tax may be claimed as an above-the-line deduction on Form 1040 (as an adjustment to gross income).
In 2016, you may again be subject to the Net Investment Income Tax (NIIT). The tax rate and thresholds have not changed and are as follows: 3.8 percent of the smaller of (a) your net investment income or (b) the excess of your modified adjusted gross income over: $125,000 if married filing separately, $250,000 if married filing jointly or qualifying widow(er), or $200,000 if single or head of household. This tax is calculated on Form 8960.
If you have a same-sex spouse whom you lawfully married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse are treated as married for all federal tax purposes and must use the married filing jointly or married filing separately filing status on your 2016 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. Answers to frequently asked questions (FAQs) for individuals of the same sex who are married under state law are available at www.irs.gov/uac/answers-to-frequently-asked-questions-for-same-sex-married-couples
The personal exemption amount for 2016 is $4,050. The amount is phased out if your adjusted gross income exceeds: $155,650 if married filing separately, $259,400 if single, $285,350 if head of household, or $311,300 if married filing jointly or qualifying widow(er).
The basic standard deduction is $6,300 for singles; $9,300 for heads of household; $12,600 for married filing jointly or qualifying widow(er), and $6,300 for married filing separately. There is an additional standard deduction of $1,550 for tax payers over 65 or blind if filing as single or head of household ($3,100 if over 65 and blind). If married filing jointly, the additional standard deduction is $1,250 if one spouse is 65 or older or blind, $2,500 if both spouses are at least 65 (or one is 65 and blind), or both are blind and under age 65.
If you choose to use itemized deductions rather than taking the basic standard deduction, those itemized deductions are phased out if your adjusted gross income (“AGI”) exceeds: $155,650 if married filing separately, $259,400 if single, $285,350 if head of household, or $311,300 if married filing jointly or qualifying widow(er).This phase-out does not apply to medical expenses, investment interest, casualty/theft losses, or gambling losses. Other itemized deductions are reduced by 3% of AGI exceeding the applicable threshold, but the total reduction cannot exceed 80% of the deductions.
For 2016, the limit on the adoption credit as well as the exclusion for employer-paid adoption assistance is $13,460. The credit is phased out for modified adjusted gross income between $201,920 and $241,920. The credit is claimed on Form 8839.
For 2016 the maximum earned income tax credit is $3,373 for one qualifying child, $5,572 for two qualifying children, $6,269 for three or more qualifying children, or $506 for taxpayers who have no qualifying child. The earned income limits and adjusted gross income limits have been adjusted for inflation in 2016 and depend on filing status and/or earned income and/or adjusted gross income.
All unemployment compensation is taxable in 2016.
The standard mileage rate for business use of your car is 54 cents per mile for 2016 (a decrease from 2015). For planning purposes, the 2017 rate is currently 53.5 cents. The rate for medical expense and moving expense deductions is 19 cents per mile. For charitable volunteers, the mileage rate is 14 cents per mile.
A Required Minimum Distribution (RMD) must be received by April 1 of the year following the year in which you reach age 70½ from your traditional IRA account(s). If a RMD is not received within the required period, the IRS can impose a penalty of up to 50 percent on the amount not received.
The filing deadline for 2016 individual returns is April 18, 2017. A six-month automatic extension to file your tax return may be obtained by filing Form 4868 by this date.
For 2016, the contribution limit for traditional individual retirement accounts (“IRAs”) and Roth IRAs is unchanged at $5,500 or $6,500 for those ages 50 or older. The deduction is phased out for active participants covered by an employer pension plan at certain income levels, depending on your filing status.
For 2016 the elective deferral limit for 401(k), 403(b) and 457 plans is $18,000. If you are age 50 or older, additional “catch-up” contributions of $6,000 are permissible. If these limits were exceeded you must receive a corrective distribution to avoid penalties and interest.
Taxpayers with interests in foreign bank accounts or other foreign financial accounts or assets may have to file Form TD F90-22.1 (FBAR) or Form 8938, or possibly both. Substantial penalties may apply if a required form is not filed.
The definition of a high-deductible health plan, which is a prerequisite to funding a Health Savings Account (HSA), means a policy with a minimum deductible for 2016 of $1,300 for self-only coverage and a maximum out-of-pocket cap on co-payments and other amounts of $6,550. These limits are doubled for family coverage. The contributions to a HSA are capped at $3,350 for self-only coverage or $6,750 for family coverage.
In 2016, if the claimed value of a donated car exceeds $500, a qualifying written acknowledgment must be obtained and must be on Form 1098-C and attached to Form 1040 or no deduction is allowed. If the charitable organization sells the vehicle without having put it to significant use or improving it, the deduction may be limited.
If a new car is placed in service in 2016 and used over 50 percent for business, bonus depreciation allows an $11,160 first-year depreciation limit. The depreciation limit is $3,160 if bonus depreciation is not allowed. For a light truck or van, the limit is $11,560 if bonus depreciation applies or $3,560 without the bonus. The limits are reduced for personal use.
The annual gift tax exclusion remains at $14,000 per donee for 2016 for gifts of cash or present interests. The basic exemption amount for 2016 gift tax and estate tax purposes is $5,450,000. The top tax rate remains at 40%.
There are certain 2016 tax breaks and credits that you may be eligible for (subject to income and other limitations) including (but not limited to) the purchase of a personal residence, education expenses (including student loan interest and higher education tuition), child care expenses, health care expenses and long-term care premiums. Be sure to mention these to your tax preparer if any of these apply to you in 2016.
There was a change in 2016 in the way unmarried co-owners of a residence can deduct mortgage interest, based on an appeals court ruling. Each owner may now deduct interest on acquisition debt of up to $1,000,000 and home equity debt of up to $100,000 (These limits previously had to be divided among the co-owners).
Identity protection services received without cost, before or after a data security breach, are excludable from income; however, cash received in lieu of such services or proceeds received under an identity theft insurance policy are not excludable.
Alternative Minimum Tax (“AMT”)
For 2016, the inflation-adjusted amount used to determine the tentative minimum tax is $186,300 and the individual (AMT) exemption amounts are: $53,900 for unmarried individuals, $83,800 for married individuals filing jointly or $41,900 (50% of the joint filing amount) for married individuals filing separately.
TAXPAYER GUIDE TO IDENTITY THEFT
For 2016, the IRS, the states and the tax industry joined together to enact new safeguards and take additional actions to combat tax-related identity theft. Many of these safeguards will be invisible to you, but invaluable to fight against these criminal syndicates. If you prepare your own return with tax software, you will see new log-on standards. Some states also have taken additional steps. See your state revenue agency’s web site for additional details.
Tax-related identity theft occurs when someone uses your stolen Social Security Number (“SSN”) to file a tax return claiming a fraudulent refund. You may be unaware that this has happened until you e-file your return and discover that a return already has been filed using your SSN. Or, the IRS may send you a letter saying it has identified a suspicious return using your SSN.
Be alert to possible tax-related identity theft if you are contacted by the IRS or your tax professional/provider about: more than one tax return was filed using your SSN; you owe additional tax, refund offset or have had collection actions taken against you for a year you did not file a tax return; IRS records indicate you received wages or other income from an employer for whom you did not work.
If you are a victim of identity theft, the Federal Trade Commission recommends these steps:
- File a complaint with the FTC at identitytheft.gov.
- Contact one of the three major credit bureaus to place a fraud alert on your credit records: Equifax, Experian or TransUnion.
- Contact your financial institutions, and close any financial or credit accounts opened without your permission or tampered with by identity thieves.
If your SSN is compromised and you know or suspect you are a victim of tax-related identity theft, the IRS recommends these additional steps:
- Respond immediately to any IRS notice; call the number provided or, if instructed, go to IDVerify.irs.gov.
- Complete IRS Form 14039, Identity Theft Affidavit, if your e-filed return is rejected because of a duplicate filing under your SSN or you are instructed to do so. Use a fillable form at IRS.gov, print, then attach the form to your return and mail according to instructions.
If you previously contacted the IRS and did not have a resolution, contact the IRS Identity Protection Specialized Unit for specialized assistance at (800) 908-4490. They have teams available to assist.
INCOME & RELATED EXPENSES
Professional musicians may have income from which tax has been withheld (W-2) or income from self-employment where neither tax nor Social Security has been deducted (usually reported on Form 1099-Misc).
If the musician is self-employed, all allowable travel and other expenses should be deducted on Schedule C before the adjusted gross income is entered on page 1 of the tax return.
If the musician has only W-2 wages, these expenses must be deducted on Schedule A.
Reimbursements for expenses (e.g., travel and entertainment) received under an accountable plan do not show up on the musician’s Form W-2, are not reported as income and do not give rise to deductions. However, if the employee’s expenses exceed reimbursements, the excess may be claimed on Form 2106 as an employee business expense. Generally, reimbursements are considered received under an accountable plan if:
- They are made for deductible business expenses;
- The employee accounts for the expenses to the employer; and
- The employee returns any excess reimbursement.
Reimbursements received under a non-accountable plan (any plan other than an accountable plan) are subject to withholding and employment taxes and are shown as wages on Form W-2 and must be reported as income on Form 1040.
The employee may be able to offset the extra income by claiming employee business expenses on Form 2106, but such expenses, along with other miscellaneous itemized deductions, may be claimed only to the extent they exceed 2 percent of adjusted gross income.
You may deduct the costs of recording, including the cost of renting a studio, hiring other musicians, hiring graphic designers, printing packaging, and the cost of any materials (including blank CDs, cases, inserts, etc.). NOTE: The recording must be made for sale (i.e. there must be a profit motive).
Also deductible are employees’ expenses incurred in the practice of your profession. In addition to the travel expenses discussed above, they include:
- Union dues, assessments and initiation fees
- Commissions paid to agents and booking offices
- Dues to other professional societies;
- Rehearsal hall, studio or office rental
- Sheet music, transcriptions, arrangements, records, manuscript paper, etc.
- Stationery, printing and postage used in business
- Land line used for business (a portion of your home phone may be deducted), and costs associated with your cell phone, as long as the calls are made for business purposes
- Books and subscriptions to professional journals
- Advertising and photographs for promotion
- Other promotional expenses such as entertaining potential purchasers of music
- Gifts (not exceeding $25 per recipient)
- Repairs and upkeep of instruments
- Insurance on instruments
- Substitutes’ pay
- Legal expenses for drawing up contracts of employment
- Rental of instruments
- Depreciation of instruments or recording equipment
For self-employed freelance musicians, you may be able to deduct the cost of your internet service provider, web site designer, web site expenses, domain hosting bill or anything related to the internet that is related to your business. (If you are not self-employed, check with your tax adviser.) Also, you may be able to deduct the cost of buying a computer if it is used for business purposes, and you may also be able to deduct a portion of the depreciation on your computer each year. (If you are not self-employed, check with your tax adviser.)
Self-employed musicians (those who file Schedule C) may take tax deductions for contributions made to formal pension or profit-sharing plans for themselves and their employees. The procedures for this are quite complicated, and we advise that professional assistance be obtained.
The following items – home office and travel expenses and expenses for uniforms – were omitted from the above list. A word of caution is needed as to their deductibility.
HOME OFFICE EXPENSES
You may claim a deduction if you use your home office exclusively and regularly for the administration or management activities of your business and you have no other fixed location where you conduct such activities. “Exclusive use” means that the office space cannot be used for personal purposes. Home office expenses in excess of your net business income as a musician are not deductible. The rules for the Home Office expense deduction go beyond this general description and should be discussed with your tax preparer.
The IRS has now provided an optional safe-harbor method for calculating home office deductions on schedule C.
The deductibility of long-distance travel involving railroad or plane fares is fairly clear. The fares, plus related costs – such as taxis to or from the depot, baggage-handling charges and passports for business trips – are all deductible as travel expenses.
If you were away from home overnight, you may also deduct all of the following expenses: 50 percent of meals and entertainment; 100 percent of travel and lodging; laundry and cleaning; tips to bellhops and chambermaids; and transportation at your destination.
Musicians may also use their own cars for business travel. The deductible items involved include: depreciation of the cost of the auto; gas, oil and tires; insurance, license and registration fees; parking expenses (e.g., garage rental or parking meters); and parkway or bridge tolls. The point to remember in deducting auto expenses is that after you have totaled all of these costs, you must subtract that portion used for personal purposes.
The regulations call for an allocation based upon both time and mileage used, and this is often the most difficult part of the calculation.
An alternate method involves computing the amount of business mileage and then multiplying those miles driven by 54 cents per mile (for 2016). You may still deduct direct costs such as parking and tolls (but not depreciation, gas or oil).
The real problem in travel expenses is determining what portion of local travel (that is, not away from home overnight) is deductible.
In no case are personal meals deductible if the musician does not sleep away from home.
The regulations say that commuting costs are not deductible. This means that if the musician travels only from home to the hall and back again, the costs of travel are not deductible – even if the instruments are so bulky and heavy that it is impossible to use public transportation.
The costs of transporting instruments to and from work are deductible only if extra costs were incurred.
If you are playing more than one job during the day, you may use the business mileage formula described above for travel between jobs.
Again, except for any additional expenses, there is no auto deduction for travel to the first job or home from the last.
EXPENSES FOR UNIFORMS
The cost of uniforms and other apparel, including their cleaning, laundering and repair, is deductible only if the garments are specially required in order for you to keep your job and are not adaptable to general or continued wear, to the extent that they could replace your regular clothing.
You may not deduct the cost of ordinary clothes used as work clothes on the grounds that they get harder use than customary garments, that they are soiled after a day’s work and cannot be worn socially or that they were purchased for your convenience to save wear and tear on your better clothes.
That your job requires you to wear expensive clothing is not, according to the IRS, a basis for deducting the cost of the clothes, if the clothing is suitable for wear off the job.
Deductions have been allowed to musicians for formal wear and the costs of theatrical clothing and accessories, if these items are not suitable for ordinary use.
JOB EXPENSES & EDUCATION
Bills are required as proof for all job expense items exceeding $75.
There are many items of a lesser amount – such as tips and taxi fares – where no proof may be obtained.
Detailed records must be kept of these expenses (and of business mileage if a car is involved) through a careful diary or log. Keeping such records takes time and effort. If your return is ever examined, however, you could lose your entire deduction in the absence of a good log or diary.
Numerous other items are deductible by the professional musician. Among these are education expenses, accounting fees and fees for investment advice.
With regard to education, you may take a deduction for any training or coaching that sharpens your present job or professional skills, or meets the expressed requirements of your employer for you to retain your job. You may also be able to deduct the cost of a course if you are entering a new specialty within the music field.
If you make less than $16K as a musician, check out this tax tip!
If you earn less than $16,000 for the year as a musician, you may be eligible to deduct business expenses as an “above the line” deduction, meaning that it can directly reduce your adjusted gross income. This could be an advantage for musicians. The following information is from IRS publication 463 (see www.irs.gov):
If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. To qualify, you must meet all of the following requirements:
- During the tax year, you perform services in the performing arts as an employee for at least two employers and you receive at least $200 each from any two of these employers.
- Your related performing-arts business expenses are more than 10 percent of your gross income from the performance of those services.
- Your adjusted gross income is not more than $16,000 before deducting these business expenses.
If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year. If you file a joint return, you must figure requirements (1) and (2) separately for both you and your spouse. However, requirement (3) applies to your and your spouse’s combined adjusted gross income.
If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. Then you include your performing-arts-related expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24.
If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on Schedule A (Form 1040), line 21.