Each year, as the tax season approaches, Allegro publishes updated tax tips for musicians provided by Local 802’s accounting firm, Gould, Kobrick & Schlapp P.C. These articles focus 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. This article and all accompanying articles do not constitute tax advice or an accountant-client relationship. You should consult with your tax professional regarding your specific circumstances. As the tax rules and interpretations are complex and change frequently, the information contained in these articles may not always be up to date.
The new tax law, commonly known as the Tax Cuts and Jobs Act (or simply the “Act”), is effective with the filing of your 2018 tax return. It was the biggest federal tax law change in over 30 years. This year’s article will begin with a discussion of the Act, highlighting what is new and different as it relates to prior law. Unless otherwise noted, the changes are effective for tax years beginning in 2018 (through 2025).
TAX RETURN DEADLINE
The filing deadline for 2018 individual returns is April 15, 2019. A six-month automatic extension to file your tax return may be obtained by filing Form 4868 by this date.
The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The applicable dollar amounts associated with these tax rates depends on filing status. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly.
The rates applicable to net capital gains and qualified dividends were not changed.
The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. These figures will be indexed for inflation after 2018. (Given these increases, many taxpayers will no longer be itemizing deductions).
The itemized deduction for state and local income tax and property taxes is limited to a combined total of $10,000.
Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. There is no change for mortgage loans issued prior to 2018. There is no longer any deduction for interest on home equity loans that are not used to buy, build or substantially improve the home that secures the debt, regardless of when the debt was incurred.
There is no longer a federal deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2% of adjusted gross income. This category included items such as tax preparation, investment expenses, union dues, and unreimbursed employee expenses. See Harvey Mars’ article above for more information.
As a result of the legislation passed and signed into law in April 2017, union members in the state of New York may have the opportunity to deduct their union dues on their NY return. Beginning in 2018, union members will be able to deduct their union dues if they itemize deductions on their state return. This applies even if you are not able to utilize itemized deductions on your federal return.
Medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.
The overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds was suspended.
The deduction for job-related moving expenses has been eliminated, except for certain military personnel. (The exclusion for moving expense reimbursements has also been suspended)
Charitable contributions are limited to 60% of adjusted gross income (AGI) in 2018 (compared with 50% in 2017)
ALTERNATIVE MINIMUM TAX EXEMPTION
The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption starts phasing out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
NEW DEDUCTION FOR “QUALIFIED BUSINESS INCOME”
Starting in 2018, taxpayers are allowed a deduction equal to 20% of “qualified business income,” otherwise known as “pass-through” income (i.e., income from partnerships, S corporations, LLCs, and sole proprietorships). The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from service related businesses (such as health, law, consulting, athletics, performing artists, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners) is phased out of qualified business income.
CHILD AND FAMILY TAX CREDIT
The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases up to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
ESTATE AND GIFT TAX EXEMPTION
Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to $11.18 million ($22.36 million for married couples). The annual gift tax exclusion increased to $15,000 per donee for gifts of cash or present Interests. The top tax rate remains at 40%.
This ends the specific discussion of the new tax law. What follows are general tax tips for musicians. Please remember that under the new tax law, some expenses that are no longer deductible for employees are still deductible for self-employed musicians. When in doubt, contact a tax professional.
REQUIRED TO HAVE HEALTH COVERAGE
Under the Individual Health Care Mandate, you are still 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. Starting in 2019 (not for 2018 returns), there will no longer be a penalty for individuals who fail to obtain minimum essential health coverage. The penalty tax is called the shared responsibility payment and for 2018 it is the greater of: 2.5% 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.
SOCIAL SECURITY AND MEDICARE
For 2018, the tax rate on the employee portion of Social Security is 6.2% on wages up to $128,400, so Social Security tax withholdings should not exceed $7,960.80. Medicare tax remains at 1.45% 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% additional Medicare tax. This tax is calculated on Form 8959.
On Schedule SE for 2017, self-employment tax of 15.3% applies to earnings of up to $128,400 after the earnings are reduced by 7.65%. The 15.3% rate equals 12.4% for Social Security (6.2% employee share and 6.2% employer share) plus 2.9% for Medicare. If net earnings exceed $128,400, the 2.9% 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).
NET INVESTMENT INCOME TAX
In 2018, 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% 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 2018 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: https://www.irs.gov/uac/answers-to-frequently-asked-questions-for-same-sex-married-couples
FILING AS SINGLE OR JOINTLY
There is an additional standard deduction of $1,600 for taxpayers over 65 or blind if filing as single or head of household ($3,200 if over 65 and blind). If married filing jointly, the additional standard deduction is $1,300 if one spouse is 65 or older or blind, $2,600 if both spouses are at least 65 (or one is 65 and blind), or both are blind and under age 65.
For 2018, the limit on the adoption credit as well as the exclusion for employer-paid adoption assistance is $13,810. The credit is phased out for modified adjusted gross income between $207,140 and $247,140. The credit is claimed on Form 8839.
EARNED INCOME TAX CREDIT
For 2018 the maximum earned income tax credit is $3,461 for one qualifying child, $5,716 for two qualifying children, $6,431 for three or more qualifying children, or $519 for taxpayers who have no qualifying child. The earned income limits and adjusted gross income limits have been adjusted for inflation in 2018 and depend on filing status and/or earned income and/or adjusted gross income.
All unemployment compensation is taxable in 2018.
The standard mileage rate for business use of your car is 54.5 cents per mile for 2018. The rate for medical expense and moving expense deductions is 18 cents per mile. For charitable volunteers, the mileage rate is 14 cents per mile.
IRA AND RETIREMENT ACCOUNTS
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% on the amount not received.
For 2018, 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 2018 the elective deferral limits for 401(k), 403(b) and 457 plans is $18,500. 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.
FOREIGN BANK ACCOUNTS
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.
HEALTH SAVINGS ACCOUNT
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 2018 of $1,350 for self-only coverage and a maximum out-of-pocket cap on co-payments and other amounts of $6,650. These limits are doubled for family coverage. The contributions to a HSA are capped at $3,450 for self-only coverage or $6,900 for family coverage.
DONATING A CAR
In 2018, if the claimed value of a donated car exceeds $500, a qualifying written acknowledgment should be obtained from the charity and be reported to you on Form 1098-C. 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 2018 and used over 50% for business, bonus depreciation allows an $18,000 first-year depreciation limit. The depreciation limit is $10,000 if bonus depreciation is not allowed. There are different rules for larger vehicles (SUV’s, vans and trucks weighing 6,000 lbs. but not more than 14,000 lbs.) that are more complicated (consult your tax advisor). The limits are reduced for personal use.
OTHER TAX BREAKS AND CREDITS
There are certain 2018 tax breaks and credits that you may be eligible for (subject to income and other limitations) including (but not limited to) mortgage insurance premiums, 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 2018.
The following tax breaks expired at the end of 2017 and have not been extended for 2018:
- The above·the·line deduction for tuition and fees
- The exclusion for canceled principal residence indebtedness
- The tax credit for home insulation, storm windows, and other energy improvements
- Eligibility for savers credit: the adjusted gross income brackets for the 10%, 20%, and 50% credits were increased for 2018. No credit is allowed when AGI exceeds $31,500 for single taxpayers, $47,250 for heads of households, and $63,000 for married persons filing jointly.
- 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.
TAXPAYER GUIDE TO IDENTITY THEFT
For 2018, the IRS, the states and the tax industry continue to use safeguards and take 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 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, www.Equifax.com, 1-800-766-0008; Experian, www.Experian.com, 1-888-397-3742; TransUnion, www.TransUnion.com, 1-800-680-7289
- 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 1-800-908-4490. 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, the new tax act has eliminated the ability to deduct these costs. If possible, it may be advantageous to receive income from your trade as an independent contractor rather than as an employee. The employer may not be willing to do this and independent contractor rules are complicated and looked at closely by the IRS, so discuss this with your tax professional.
Reimbursements for expenses (e.g., travel and entertainment) received under an accountable plan should not be reported on the musician’s Form W-2, and are not reported as income. 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.
Self-employed and freelance musicians (those not getting a W-2 and filing a Schedule C) 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 for self-employed musicians are expenses incurred in the practice of your profession.
In addition to the travel expenses discussed above, they include:
- Union dues, assessments and initiation fees. (As mentioned at the top of this article, union dues are not deductible for employees under the new tax law. However, some items that are no longer deductible for employees are still deductible for independent contractors who itemize their expenses.)
- 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;
- Telephone used for business (a portion of your home phone may be deducted);
- 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;
- 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; and
- Depreciation of instruments or recording equipment.
The following additional expenses may be deductible:
- Costs of your internet service provider, website designer, website expenses, domain hosting bill or anything related to the internet that is related to your business. 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.
- 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 next two 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% of meals and entertainment (see additional notes and caution at end); 100% of travel and lodging; laundry and cleaning; reasonable tips to bellhops and other hotel employees; 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 54.5 cents per mile (for 2018). 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.
No entertainment, amusement, or recreation expenses
Unfortunately, after the Tax Cuts and Jobs Act, entertainment, amusement, or recreation expenses for clients and business associates are no longer allowed as business deductions, starting Jan. 1, 2018, Business meals provided to clients and business associates are discussed below.
The IRS issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the TCJA.
Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
The expense is an ordinary and necessary business expense under Sec. 162(a) that is paid or incurred during the tax year when carrying on any trade or business;
The expense is not lavish or extravagant under the circumstances;
The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.