One of my kids is a self employed musician…at least partly. He has always been able to deduct his business expenses related to his music work…and we are getting mixed reviews about how this will need to be done for the 2018 return.
His business expenses are well documented, but he is not a LLC or anything like that. But he gets a good chunk of his annual income doing 1099 freelance work. The deductions he takes typically save him about $2000 a year in taxes/self employment tax.
Thoughts?
@thumper1 it might depend on how his music work is classified. Performances might be different than giving lessons for example. You might need to wait until the IRS regulations come out for clarification. In the meantime make sure to keep detailed records.
Doing more research on the pass thru deduction while it can get complicated it seems like it will be really advantageous for pass thru organizations. Looks like it can lower many businesses taxes below the 21% corporate rate.
If it’s pass-through, it wouldn’t be taxed at the business rate, it would be taxed at the individual’s rate. The 21% rate is for corporations, I thought.
@thumper1 does your kid file schedule C for his music business?
I have no idea how he files his taxes. I’ll ask him on Thursday!
@notrichenough. That is correct. Because c corps dividends are double taxed, it can make sense to pay a higher personal tax on a business profits. But just doing some math, it looks like the pass thru rate will effectively be lower because of the 20% deduction.
@thumper1 – there is no change in the basis rules for filing a schedule C. If your son gets paid via 1099’s, he would have to also be filing schedule C’s – IRS is very diligent about following up on 1099’s that are not accounted for on a return – so any sort of 1099 that reflects payment for a service will trigger the need to file a schedule C.
The question is whether for 2018 he will also get an additional personal deduction based on his net schedule C income. I think he will, but the provisions are rather complicated. But basically I think the numbers will look something this:
Schedule C income = Net income after subtracting business expenses from gross receipts.
Self employment tax: 15.3% x C
A self-employed person can subtract 1/2 of the self-employment tax and cost of health insurance from total income to get AGI.
From AGI, a standard deduction of $12K is subtracted to get taxable income.
I think that under the new law there will also be a second deduction from AGI of 20% of the schedule C amount, but there might be other limitations that apply. But if I am correct, this will further reduce taxable income.
Then tax is the amount from the tax table + self-employment insurance. (I am assuming your musician son does not have to worry about AMT).
But there is no need to really know about any of this stuff now – IRS will issue appropriate regulations and this should be incorporated into tax software in 2019. If there is a deduction, it’s a nice bonus for us schedule C followers – and if not, it doesn’t make a difference for us.
My husband is a software consultant. He presently doesn’t have an S-corp or a C-corp. Is there some way he should organize his business to get the 20% pass-through deduction?
A person has assets that produce income, and they intend the assets, or the income, or both, to be willed to their heirs. Is there a way to stash them in a sham company so they don’t have to pay capital gains?
@cardinalfang. I think he’ll get the deduction as a sole proprietorship. But I would look into using an LLC for legal reasons. His clients will be doing business with the company and not him. Therefore, in the unlikelihood of a catestrophic error they could only go after LLC assets. Also, setting up as a separate entity helps to keep things separate. For tax purposes, a single member LLC will be disregarded so there is no separate tax return and extra costs.
@cardinalfang as for avoiding taxes on business assets, it all depends and every strategy is loaded with pitfalls. Working with a good accountant/attorney is money well spent.
When you die, your assets are valued and transferred at that value. If your estate is subject to tax, you have to pay that instead of capital gains. Your kids take the asset at that value and will only pay capital gains when they sell based on that stepped up value. If your assets will appreciate, One thing to do is setup a structure which gives the capital appreciation to the kids while restaining the current income for mom and dad.
I thought an employer has to have a W4 on file for every employee.
You cannot just tell the payroll person to withhold whatever.
The current W4 has questions on it that are supposed to help you figure out the correct withholding.
It asks married or single, does one spouse have a job or both.
It figures allowances you can claim.
For example one allowance for my H, one for me, one since I don’t work, one for each of our dependent children, one for the child credit, etc.
I think one year we had Married with 9 allowances on the W4. Now we only claim 5 allowances because our older kids don’t qualify for child credit anymore and we like to get a refund.
But with the new rules we will have to see. Should be fine since we usually overwithhold and I think our tax bill will be slightly lower in. 2018 because we should be in a lower tax bracket.
Maybe the new W4 will have single and married as choices, and whether you have kids that qualify for child credit.
Here is some info about W4
https://www.irs.gov/taxtopics/tc753
You can change your W4 during the year if you think you might not have enough withheld.
We will just have to wait for the new W4 2018 to be available.
Will the gift tax exclusion remain $15,000 for 2018 and beyond? Now that the estate tax threshold has been raised to $11 million ($22 million for couples) it seems the rationale for the exclusion is obsolete except for the few thousand estates subject to the new estate tax cutoffs.
Sure you can. You can fill out the W4 with 99 personal exemptions, which will cause 0 tax to be withheld. Then you go to the ‘additional tax you would like withheld’ line and fill it in with the amount you would like withheld.
I’ve done this. When I worked for the government our agency had it online (we were paid by the Dept of Agriculture as are 1/3 of government agencies). I’d change the withholdings, the 401k contributions, the extra over 50 catch ups. And I could do it every two weeks if I wanted to. It was a little game I played.
You can fill in a new W4 every week if you want to. If you have a person doing the payroll, that person won’t be too happy. Our was done by computer so no one cared.
Yep…that’s true! Funny…I just completed some work…and I asked that $100 additional be withheld from each pay period. My last pay period was only one day…and they withheld $100…as I asked. Oh well.
Yes…that’s right…the more exemptions you put…the less they hold out. That is why we always put zero…because we wanted MORE held out.
And we had an additional amount withheld per pay period as well…both of us.
Still…we had some years when we got significant refunds when we filed…and other years when we had to make significant payments.
Whatever…we will wait and see…and adjust so that DHs take home pay is wht it was each pay period in 2017…we will know after the first pay check with the new adjusted withholding per this new year…whenever that happens!
Yes, I’ve done it. Just this week I asked our payroll lady to withhold an extra $500 in state tax on my last paycheck because it looked like I was going to be a little under on state taxes for the year. It is probably easier when you work for a small company like I do.
“You cannot just tell the payroll person to withhold whatever.”
Well I have been doing it for 20 years.
@yourmomma
Yes, but I meant not without the W4 form.
You gave an example of simply telling the payroll person how much to withhold, no mention of a W4 being filed.
And if you read the quote in post #151 about the W4 requirement for employers, it states that a W4 must be completed by the employee.
Re: rationale for gift exclusion is that anything in the amount of $15k and under does NOT have to be reported to the IRS. If you gift something over, you will need to fill out a special form so the IRS will keep tally of your lifetime gifts. Let’s say you personally give a gift of a $100k condo to the kid. You report $100k and subtract $15k making this a total gift of $85k. One can ask - why would anyone need to do this as only the Richie Rich estates are subject to estate tax… You need to do this because the size of your estate is not known until the moment you die. You might win a powerball and die crashing your new Lamborghini… or your aunt could leave you her mattress full of $100 bills… 