10-27-06
Election Year Help
You may have recently received an e-mail blast from Equity or SAG or AFTRA about a bill introduced by Senator Charles Schumer (D-NY). This bill, S. 3893, would finally update the “qualified performing artist” (QPA) deduction rules and create tax savings for the actors who need it most: those who are making some money from their art, but not much. The bill is co-sponsored by Senator Diane Feinstein (D-CA), and supported by those three unions.
What It Involves
Some backstory is in order, because the odds are good that you have never heard of the QPA deduction rules. I’ve only written about them twice in 15 years of doing this column.
As I explain just about annually, an individual taxpayer’s deductible business expenses may relate to their earnings as an independent contractor, their earnings as an employee, or both (in which case they must be allocated between the types of income). Expenses related to independent contractor (“1099”) income are fully deductible, both for income tax and self-employment tax.
But expenses related to earnings as an employee are deductible only to the extent they exceed 2 percent of the taxpayer’s adjusted gross income, and then only as itemized deductions along with home mortgage interest, property taxes, state and local income taxes, charitable contributions, and a few others. (Inhale deeply.) An itemized deduction is useful only if all of them combined are more than the standard deduction of roughly $5,000 for a single person, $10,000 for a married couple.
A struggling actor with a few gigs and a survival job is not going to have itemized deductions that large.
The QPA provisions are an exception to the “itemized-deductions-only” rule. They allow performers with two or more employers in the arts during the year to deduct their business expenses in addition to the standard deduction. But there’s a catch. The taxpayer’s adjusted gross income before these deductions cannot exceed $16,000 from all sources. At that low income, who can even afford to pay their union dues?
A Brief History Lesson
How did this bizarre provision come about?
Let’s go back 20 years, to 1986. Public indignation about an overly complex and unfair tax code was high – and justified. You could almost smell the corruption and fear of indictments on Capitol Hill. Sort of like now.
Then Representative Daniel Rostenkowski was chairman of the House Ways and Means Committee, which has control of tax legislation in the house. He had a masterful grasp of government finance, tax law and how to get things passed. Unfortunately, he was also a Chicago Democratic Machine politician. Like so many of those, he had sticky fingers and eventually went to prison over a relatively petty check-kiting and ghost payroll scheme. Had he stayed in office, our tax policy might have been more rational over the past decade. But I digress.
Rostenkowski masterminded the 1986 Tax Reform Act, a massive overhaul and simplification of the Internal Revenue Code. Prior to that Act, any taxpayer could deduct employee business expenses “off the top.” Changing these to itemized deductions was, I think, intended to eliminate a lot of small, dubious deductions while still giving a tax break to those with significant unreimbursed expenses. This actually made sense for people who have a steady, full-time job with one employer where most genuine business expenses would typically be reimbursed.
Actors, of course, have a different situation entirely. Equity fought the battle hard and long in 1986, but the tide was against them. A major thrust of the 1986 Act was to eliminate special-interest provisions, not add them. Getting this inadequate, $16,000 provision was a major accomplishment. I suspect the hope was it could be quietly tidied up and made more useful in a year or two.
Instead, 20 years passed before anyone even proposed a fix.
S. 3893 would raise the $16,000 limit to $30,000 immediately, and index it for inflation starting in 2011. The raise to $30,000 just barely covers inflation from 1986 to now. Still, it’s better than nothing.
There Is Still a Problem
The bigger problem with S. 3893 is that it leaves in place one of the last vestiges of the “marriage tax” that Republicans used to whine so loudly about. You remember, the idea that taxes would go up if a couple married instead of just shacking up. Of course, that increase only occurred if the two spouses had relatively similar incomes. The old rules provided a tax break to households with a stay-at-home, non-earning spouse – the traditional “KKK” women’s role so adored by Southern Republican prigs. (No, not that KKK, though I wouldn’t put it past some of those Republicans; this “KKK” refers to the German phrase for that traditional role, “Kirche, Kuechen und Kinder.”)
That marriage tax problem was “solved” by adjusting the income tax brackets and standard deduction for married couples filing joint returns to exactly double the size of those for single people. The same logic should be applied to the qualified performing artist provision. The $16,000 (soon, we hope, to be $30,000) limit applies identically whether it is a single person or a married couple. Either figure is little enough income for one person, but laughable for two.
Peroration and Exhortation
As I said earlier, the proposal is still better than the almost-nothing we’ve had for the past 20 years. Let me urge you to write or e-mail your Senators and Congressman – maybe even those in adjoining Congressional districts – urging the passage of S. 3893. You can e-mail them directly from www.senate.gov and www.house.gov. (The House site will even let you look up your Representative based on your zip code.)
And while you’re moved to political action, I want to remind you that elections are coming up on Nov. 7. There’s a real opportunity for change this year, so please get out there and vote in your own interests. Molly Ivins said it well, “You can’t ignore politics, no matter how much you’d like to.”
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.