Tax tips for musicians
Volume 115, No. 3March, 2015
This article contains general information only and is not intended to address the circumstances of any specific individual. The information contained herein is accurate as of the date of publication, but there is no guarantee that such information will be accurate in the future. Before making any decisions or taking any actions that may affect your tax or financial situation, you should consult your own professional advisor.
Welcome to tax filing season. It is the annual ritual that is greeted with such glee. Not! Although tax filing may not be your favorite task, it should be taken seriously, as it is an opportunity to critique your past year and plan for the coming year using some quantifiable data.
You may remember that one of the biggest changes to our society that the Affordable Care Act (a/k/a “Obamacare”) brought is the requirement that everyone in the country (with a few exceptions) has to be covered by health insurance. Your tax return is where you will show the government that you have health insurance. Technically, you need to show minimum essential coverage for everyone on your return. This requirement applies to all adults as well as children.
Anyone who was not covered during at least one day of each month must qualify for an exemption or pay a penalty (which is called a “shared responsibility payment”). Government programs such as Medicare, Medicaid and Tricare qualify for the exemption. The penalty payment for not having health insurance is the greater of $95 per adult plus $47.50 per child under age 18 years old (limited to a family maximum of $285) or 1 percent of the household income above the filing threshold for your status (single, head of household, married filing jointly or separately). Any exemption claimed is reported on new Form 8965, “Health Coverage Exemptions,” which gets filed with your tax return. Any penalty due is calculated by using worksheets found in the instructions to Form 8965 and is carried over to your return, to be included in total tax liability. Of course, if you had the required coverage, all that is needed is to check the box. Whew!
If you purchased insurance through HealthCare.gov or any of the state “Marketplaces,” be sure to complete new Form 8962, “Premium Tax Credit,” to determine or reconcile your credit. There is no premium tax credit for insurance purchased outside of the HealthCare.gov or a state Marketplace system.
Another new set of wrinkles involves changes to the regulations affecting so-called tangible personal property, including musical instruments and accessories. Items that are considered “materials and supplies” must be deducted in the current tax year as opposed to being depreciated. The new regulations define “materials and supplies” to include purchases that cost $200 or less, regardless of their useful life. Also, certain equipment purchases and capital improvements of up to $500 can now be deducted as repairs. So, if you have an instrument repaired, that expense may be deducted immediately rather than being added to the cost basis to be depreciated. The IRS has backed off from the original compliance reporting guidelines, so now all that is necessary is to make an annual election with your tax return in order to adopt this provision.
On the good news front, the court case of Susan Crile should be music to your ears. Crile is an artist who operates as a proprietor from her Manhattan apartment. She is also a tenured college professor. The Internal Revenue Service sued her for back taxes and penalties claiming that because she is a tenured professor of art, teaching was her profession. Therefore, the IRS’s position was that she was not entitled to deduct expenses incurred as an artist operating a business on Schedule C.
This case is significant because it has far-reaching ramifications for all creative artists. Many musicians hold jobs outside of the music business to supplement their income. The opinion rendered by the judge in this case was that Crile’s teaching and her art-making were separate activities, each standing on its own merits. That decision was based, in part, on her keeping detailed business records of income and expenses and making a considerable effort to market her work. An interesting note to this case is that the court “bifurcated” or divided the case to be heard in two parts. Part 1 is complete; Ms. Criles won the case and is permitted to deduct expenses in excess of her income. Part 2 will decide whether the deductions she claimed were actually allowable under other provisions of the tax code as “ordinary and necessary business expenses.” It will be interesting to see how this second part of the case unfolds.
If you’re a self-employed musician, you need to keep in mind that you are actually a small business owner. In addition to honing your skills, it pays (literally) to hone your recordkeeping skills or hire someone to assist you.
Despite its somewhat outdated technology and confusing maze of computer systems that do not play well together, the IRS has launched a directory of federal tax return preparers. It is up and running and you can check out a new page called “Understanding Tax Return Preparer Credentials and Qualifications,” at www.irs.gov/Tax-Professionals/Understanding-Tax-Return-Preparer-Credentials-and-Qualifications. There you can learn about the differences in professional credentials.
Lastly, here are some key figures you will need to prepare 2014 returns:
- Personal exemption: $3,950
- Basic standard exemption: $6,200 (single or married filing separately); $9,100 (head of household); $12,400 (married filing jointly or qualifying widow)
- Business mileage is now 56 cents per mile
- IRA contribution limits: $5,500 (under age 50); $6,500 (age 50 and older)
Walter Gowens and Phyllis Jo Kubey are both Enrolled Agents who specialize in performing artists. Walter can be e-mailed at AAAA@PrudentialVanguard.net and Phyllis and be e-mailed at firstname.lastname@example.org. Next month’s Allegro will feature more tax tips from Local 802’s accounting firm.