Guest columnist Scott Stratton, trombonist and member of Local 72-147 (Dallas-Fort Worth, TX), provides commentary and direction for musicians navigating changes to US tax law. It is provided for informational purposes only, not as a substitute for advice from your personal tax professional.
The Tax Cuts And Jobs Act (TCJA) passed in December presents the most sweeping changes to US tax policy in 30 years and will have a significant impact on working musicians. The changes discussed below apply to your 2018 taxes. Your 2017 taxes (to be filed in April 2018) are still under the old rules.
Many musicians will find their federal income taxes decrease slightly, but there are so many changes that some musicians may actually see their taxes go up, especially if they are a W-2 employee, live in a high tax state, and previously had a significant amount of itemized deductions.
Most taxpayers will see a 1% to 4% reduction in their marginal tax rate, although some single taxpayers in the 28% bracket for 2017 have been bumped up to 32% and some in the 33% bracket will pay 35% in 2018. The new tax brackets have a sunset after 2025, when the 2017 tax rates are scheduled to return.
The standard deduction will increase from $6,350 in 2017 to $12,000 in 2018 for single taxpayers, and from $12,700 to $24,000 for married couples. However, the personal exemption of $4,050 has been eliminated, so the increase in tax-free income is really only from $10,400 to $12,000. A family of four previously would have had a standard deduction and personal exemptions of $28,900 and they will actually see this fall to $24,000. Offsetting this is an expansion of the Child Tax Credit from $1,000 to $2,000 and an increase of the qualifying income cap from $75,000 to $200,000 (single) and $110,000 to $400,000 (married).
For musicians who are W-2 employees, perhaps for an orchestra or university, it will become very difficult to have enough itemized deductions to exceed the standard deduction of $12,000/$24,000. That’s not only because of the higher levels, but also because the TCJA caps or eliminates many of our prior deductions. It is expected that the number of taxpayers who itemize will fall from around one-third to less than 10% in 2018.
First, your deduction of state and local taxes will be capped at $10,000 (single or married). For musicians who live in high tax areas, it is very possible that you spend significantly more than this amount on your property tax, state income tax, and sales tax. If you have a home equity loan or line of credit, those interest payments will no longer be deductible in 2018, unless the loan was used for the acquisition of that property.
Second, the TCJA has repealed all “Miscellaneous Itemized Deductions.” Starting in 2018, W-2 musicians can no longer deduct “Unreimbursed Employee Expenses,” such as buying an instrument, sheet music, supplies or equipment, required concert clothing, mileage, job search/audition expenses, research expenses for professors, or your home office expenses. Additionally, you can no longer deduct tax preparation fees, investment management fees, memberships to professional organizations, or union membership and work dues.
What is so unprecedented about this change is that it penalizes W-2 employees (who itemize deductions on Schedule A), but most of those costs remain valid expenses for musicians who are self-employed and report their business income on Schedule C. If you are a W-2 employee, and face losing all these deductions, I’d recommend you try to add some Schedule C income on the side, such as teaching private lessons in your home, so you can claim some of these expenses on Schedule C.
For self-employed musicians (including 1099), there are two additional benefits starting in 2018. First, there is a new 20% deduction for small businesses that are “pass-through” entities. Pass through entities will be taxed on only 80% of their qualified business income (QBI). A lot of musicians have asked me if they need to form an LLC or S-corporation to be eligible, but thankfully, the answer is no. Anyone who is a sole proprietor and reports on Schedule C can claim this deduction. You do not need to incorporate.
Here’s where it gets more complicated. Congress sought to limit the ability of service professionals such as doctors or lawyers to use this deduction, but the IRS definition of a “specified service business” also includes performing arts. This means that there is an income cap for musicians to qualify for the QBI deduction. To be eligible, your taxable income must be under $157,500 (single) or $315,000 (married). Above these amounts, the 20% deduction is phased out over the next $50,000 (single) or $100,000 (married). That’s still good news for most self-employed musicians.
The second benefit for self-employed musicians is the expansion of Section 179 rules. Section 179 allows small business owners to immediately deduct business purchases, such as musical instruments, sound and recording equipment, computers, office furniture, or certain business vehicles like an SUV or van. Without Section 179, these large purchases would have to be depreciated over a number of years. For 2018 through 2022, Section 179 limits have been increased, bonus depreciation has been increased from 50% to 100%, and used equipment is now eligible for bonus depreciation.
Please talk with your tax advisor about how these changes might impact your individual situation. The authors of the TCJA were clearly more concerned with helping businesses than employees. This is seen in how positive things are for self-employed musicians versus how W-2 musicians were given a mixed bag of small benefits in the standard deduction and lower tax rates, but an effective loss of the ability to itemize. One thing is for sure—it will help if you know in advance what you will be able to deduct and what is not deductible, and be sure to keep excellent records of receipts, mileage, and expenses.
—Scott Stratton, CFP, CFA is the president of Good Life Wealth Management and the publisher of www.FinanceForMusicians.com. He is a member of Local 72-147 (Dallas-Fort Worth, TX) and can be contacted at firstname.lastname@example.org.