Changes included in the Tax Cuts and Jobs Act could have a meaningful impact for working musicians — some will keep money in your pocket, others won’t.
The December 2017 Tax Cuts and Jobs Act (TCJA) ushered in sweeping changes to Federal Tax Codes that will affect working musicians in various ways. The TCJA is a mixed bag, with new rules that provide advantages to self-employed musicians and other changes that will likely not be great news for musicians employed by schools, music stores, orchestras, and other institutions.
While your 2018 income taxes may not be high on the list of things you’re psyched to do, you should understand how tax laws have changed so you can make the best of it. These changes went into effect on January 1, 2018, so as you begin your 2018 end-of-year tax planning, a basic understanding of these changes will help you navigate your particular situation.
Note: This article is not a substitute for seeking advice from a qualified tax specialist or accountant. It is provided for educational purposes and should not be used as the sole source of information for a tax strategy.
As a result of the TCJA, most people will see their overall marginal tax rate reduced somewhere between one to four percent. However, some musicians may see their taxes increase, especially if you receive a W-2 from a regular employer and in prior years claimed a substantial amount of deductions or live in so-called “high tax” states, such as California, Minnesota, New Jersey, and New York.
Changes to standard deductions
One of the biggest changes is that the standard deduction limit has been nearly doubled. At the same time, the new law eliminated the personal exemption of $4,050, so the net benefit to a single taxpayer is only $1,600 more in allowable deductions. If you qualify for the Child Tax Credit — good news — that’s been increased from $1,000 to $2,000.
|Standard Deduction Comparison||2017||2018|
If you receive a W-2 from your employer, it will be hard to accumulate enough itemized deductions to go over the new threshold for standard deductions shown above. The TCJA eliminates or caps many previously allowable deductions musicians have historically claimed, even if they were employed by a school, orchestra, college, or music store. Looking at the national picture, due to the newly raised limits for standard deductions, the overall number of taxpayers who are expected to itemize deductions will drop from 33 percent to less than 10 percent under the new rules.
The TCJA eliminated all “Miscellaneous Itemized Deductions” for W-2 musicians. The former category of “Unreimbursed Employee Expenses” has also been axed. So previously deductible expenses are no longer deductible for W-2 musicians, including:
- buying an instrument
- buying sheet music
- purchasing concert attire
- mileage to gigs
- union dues and membership fees for professional organizations
- subscriptions to trade journals
- tax preparation fees
Unfortunately, those necessary expenses don’t go away just because Congress enacted a new tax law. In effect, the TCJA penalizes W-2 musicians who do freelance jobs on the side. Scott Stratton, a trombonist and Dallas/Fort Worth-based financial planner suggests that if you are facing this situation, “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.”
According to the IRS, a Schedule C form is used by a sole proprietor who operates a business for income or profit and is involved in the activity with continuity and regularity. So giving one guitar lesson a year would not qualify you, but devoting one day a week to providing lessons, either in person or online, would likely meet the standard and allow taking many of the deductions lost for many W-2 musicians.
According to the U.S. Bureau of Labor Statistics, about 10 percent of Americans are self-employed (estimated 15 million). From my own experience, the number of musicians who are self-employed is much greater than those receiving a W-2 for their musical work.
A 2002 survey conducted by Princeton University estimated that there were 2.5 million artists in America, roughly 1.8 percent of the entire civilian workforce. Musicians and composers represented 11 percent of that total (273,000 people). If you are one of these self-employed musicians and regularly receive 1099s from the various places you play, features of the TCJA may improve your tax status. First and foremost, unlike W-2 musicians, you can still claim many of the normal business expenses as deductions such as dues, membership fees, and professional services for legal and tax assistance.
If you file your taxes as a small business or sole proprietor and would be considered a “pass-through” entity (see inset below), you may be eligible for a new 20 percent deduction. The way it works is that the pass-through entities will be taxed on 80 percent of their Qualified Business Income (QBI). However, if you have a particularly good year, you should be aware that there is an income cap to qualify for the 20 percent deduction. To qualify, your taxable income must be less than $157,500 (single) or $315,000 (married). If you’re doing so well that you exceed these caps, the 20 percent deduction is phased out over the next $50,000 (single) or $100,000 (married) income.
Sole proprietorships, partnerships, LLCs, and S-Corporations are considered pass-through entities for Federal Income Tax purposes. The means the entities are not subject to income tax; rather, the owners are directly taxed individually on their income, taking into account their share of the profits and losses.
The next benefit for self-employed musicians relates to the rules that allow a small business owner to deduct purchases fully in the year the purchase is made rather than depreciating the asset over time. I can recall when my band bought a 1973 Chevy Astro van and how complicated the tables were to figure out how much we could write off each year.
Forget the depreciation tables, self-employed musicians can now deduct 100 percent of the purchase price for business equipment such as musical instruments, sound and light systems, computer and recording gear, office furniture, and, in some cases, specialized vehicles such as a van or SUV used for traveling to and from gigs.
Such deductible purchases fall under Section 179 of the Federal Tax Code. As qualifying purchases, their total cost may be deductible from your pass-through entity’s gross income. Used business equipment now qualifies, so long as it is “new to you” and is used more than 50 percent of the time for business purposes. The TCJA upped the limit on Section 179 purchases from $500,000 to $1,000,000, in case you are planning to make any significant business-related equipment purchases.
The bottom line
Self-employed musicians stand to reap some benefits from the TCJA. The 20 percent deduction on Qualified Business Income and immediate deductions for all qualifying business equipment investments are tangible wins for the 1099 musician.
For W-2 musicians, the tiny reduction in marginal tax rate and increased standard deduction don’t equate to the loss of the ability to itemize and deduct many necessary expenses.
For all musicians, there are many benefits to keeping thorough written and electronic records of receipts, daily business travel, business-related repairs, and other ordinary expenses incurred in your life as a working musician. When in doubt, ask your personal tax professional if something can be deducted or not. Your tax advisor can help you take advantage of the new rules of the Tax Cuts and Jobs Act so that you pay the lowest possible taxes.
Finance for Musicians
Finance for Musicians is a website and blog hosted by Scott Stratton, a financial planner by day and working musician in the Dallas area on nights and weekends. I especially like the blog post on setting up your own teaching studio.
The Musician’s Guide to Taxes: Top Tax Deductions (TurboTax)
This is a handy summary page that reviews basic record-keeping practices for musicians and artists so you can be well-informed and prepared when it comes time to file your 2018 income tax.
Big Tax Changes for Musicians in 2018 (International Musician)
This article is an overview Scott Stratton wrote soon after the Tax Cuts and Jobs Act was signed into law.
Peter Jason Riley, CPA has an information page to help artists understand tax rules. It includes free downloadable expense checklists for musicians and singers.
A look at the Music Modernization Act
Work For Hire agreements: The producer’s perspective
Work For Hire agreements from a musician’s perspective
Gigging, touring, and performance contract tips
Tax tips for the working musician