Thursday, March 28, 2013

Tax Break for Low-Income Artists and Musicians

The front page of Form 1040 contains a deduction line for "certain business expenses of performance artists."  Many actors and musicians get excited about this tax break until they read the fine print on page 4 of the instructions to Form 2106 (which they do not have to file for this tax break).

The special deduction is only useful for performance artists who receive a W-2 as an employee.
Freelancers and independent contractors (who receive Form 1099s) are always entitled to deduct all business expenses on Schedule C, so they do not need to use this special deduction.

Internal Revenue Code section 62(b) provides that a performance artist-employee may take the special deduction only if:
1) He or she worked as an employee for at least two employers (who each paid the artist $200 or more during the year),
2) The expenses being deducted are more than 10% of the income from performance art, and
3) His or her total adjusted gross income is less than $16,000.

The $16,000 income threshold includes income from all sources, not just the performance art.  If the artist is married, the couple's combined income must be less than $16,000. 

Even if a starving artist qualifies for the deduction, it does not provide a particularly large benefit since people do not pay a lot of federal income taxes when they make less than $16,000 a year, thanks to the standard deduction, the earned income tax credit, the credit for small business low sulfur diesel refining, and other tax benefits.

The $16,000 threshold was fixed when the deduction was added in 1986, when the median household income was around $23,000 and when the median artist income was a little lower, and it has never been adjusted for inflation.

Section 62 Adjusted gross income defined
(a) General rule.
For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:
    (2)(B) Certain expenses of performing artists. The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee.
(b) Qualified performing artist.
    (1) In general.
    For purposes of subsection (a)(2)(B), the term “qualified performing artist” means, with respect to any taxable year, any individual if—
      (A) such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers,
      (B) the aggregate amount allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual's gross income attributable to the performance of such services, and
      (C) the adjusted gross income of such individual for the taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16,000.  
      (2) Nominal employer not taken into account.
      An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200.

    (3) Special rules for married couples.
      (A) In general. Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return for the taxable year.
      (B) Application of paragraph (1). In the case of a joint return—
        (i) paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but
        (ii) paragraph (1)(C) shall be applied with respect to their combined adjusted gross income.


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