The Tax Cuts and Jobs Act (TCJA) of 2018 changes how taxes are structured for Americans.
According to the IRS, if you earn $400 or more from playing music, you qualify as a working musician. There are basically two types of working musicians as far as the IRS is concerned:
- Musicians who are “employees” (of an orchestra, theatre company, university, etc.) receive a
W-2 at the end of the year. When you are an employee, expenses are itemized as deductions on a Schedule A Form.
- Musicians who are considered “self employed” receive 1099 Forms. For those musicians, expenses are itemized as deductions on a Schedule C form.
It’s possible you’re among the musicians reporting both. Are you working “one nighters” as a sideman or doing church music on Sundays, but also on-staff with an orchestra or theatre? If so, you may be filing both W-2 and 1099 income.
Changes in Basic Income Deductions
According to a March, 2018 article in International Musician, the official journal of the American Federation of Musicians of the US and Canada, most taxpayers will see a 1% to 4% reduction in their marginal tax rate. Some single taxpayers who were in the 28% bracket for 2017, however, may now be in up to a 32% bracket. And some taxpayers in the 33% bracket will pay 35% in 2018. After 2025, 2017 tax rates are scheduled to return.
Standard basic deductions 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, personal exemptions (previously $4,050) are eliminated, so the increase in tax-free income is really only from $10,400 to $12,000.
For example, if you have a family of four, you previously would have had a standard deduction and personal exemptions of $28,900. Under the TCJA this amount will fall to $24,000. To offset this the Child Tax Credit has been increased from $1,000 to $2,000 and the qualifying income cap increased from $75,000 to $200,000 (single) and $110,000 to $400,000 (married).
2018 changes for 1099 (Schedule C) Musicians
First, the “good news”: self-employed musicians (filing Schedule C) overall fare better under the new law. Business deductions, such as union dues, equipment expenses – the typical itemized deductions of a working musician – remain for those filing a Schedule C.
There are two additional benefits starting in 2018. First, there is a new 20% deduction for small businesses that are “pass-through” entities. A pass-through entity is a business structure where corporate income is allocated among the owners, and income taxes levied at the individual owner’s level.
Under this law pass-through entities will be taxed on only 80% of qualified business income (QBI). Anyone who is a sole proprietor and reports on Schedule C can claim this deduction, and incorporation is no necessary to file for it.
However, Congress did seek to limit the ability of service professionals (doctors, lawyers, etc.) to use this deduction. And the IRS definition of a “specified service business” also includes performing arts.
What this means is, there is now 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). For most self-employed musicians, this is still good news.
The second additional benefit self-employed musicians did receive is the expansion of Section 179 rules, which allow small business owners to immediately deduct business purchases. For 2018 through 2022, Section 179 limits were also increased. Used equipment is now eligible for bonus depreciation, and bonus depreciation was increased from 50% to 100%.
2018 changes for W-2 (Schedule A) Musicians
The “bad news”, is: If you’re a member of an orchestra, university or a show and are paid as a W-2 employee, you may see your taxes go up in 2018. The Tax Cuts and Jobs Act (TCJA) of 2018 caps or eliminates many traditional deductions, expenses that musicians must undertake for their careers.
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 even 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.
This unprecedented tax change technically penalizes W-2 employees (who itemize their deductions on Schedule A). However those costs remain valid deductions for “1099 Form” musicians – those who are self-employed and report business income on Schedule C.
So if you are a young orchestra musician excited about your first job with a symphony, what can you do? One way to still take those deductions might be to add some “Schedule C”/1099 Form income on the side, such as teaching some private lessons. Then you can still claim some of your crucial expenses on Schedule C.
Overall, the new tax law is a mixed bag of changes and challenges for those in the arts. Don’t hesitate to contact us to ensure you’re filing correctly.