One day last season, we prepared the return of an actor and, after recording his W-2's, we asked if there was any other income. He replied he earned about $18,000 doing print work, but had been told, "It's not taxable." This actor is an extremely bright guy and absolutely 100% honest. At first, we thought he was pulling our leg, but he was sincerely intense about it.
The agent had told him it was not taxable. It was difficult for us to convince him that the agent meant it was not taxable at the time he received the check—all paid up front, as they say, because that's how most print jobs are paid—no taxes taken out. But be assured, it is definitely taxable. It is earned income, and if the amount is of any significance during the year, you must pay estimated taxes. (More about this later.) We have known this actor for years, and we wondered if he was convinced that we were correct; he wanted so badly to believe the agent was right.
For those of you who moved during the past year or are planning to do so after you file, it would be best to notify the IRS of the change of address to facilitate any refund that is due you. This is done by filling out Form 8822—"Change of Address." Mail it to the Service Center where you last filed your return. If you move after you file your return and expect a refund, also notify the Post Office serving your old address. This will help forward your check to your new address.
In last week's column, we briefly mentioned that the exemption allowance was raised this year to $2,800. However, a point of confusion arises each year concerning this topic. Here's an explanation: For the year 2000, each "exemption" is worth $2,800. Every taxpayer is allowed one exemption, unless he or she is the dependent of another taxpayer. If someone else is entitled to claim you as a dependent for 2000, you may not claim a personal exemption for yourself on your own tax return; this is true even if the other person does not actually claim you as a dependent. This rule prevents your child or dependent from claiming an exemption on his or her return if you may claim an exemption for the child or dependent.
You may also claim an exemption for your spouse, children, and other dependents provided they qualify. Remember, each "exemption" is worth $2,800. So lets say you're married, filing a joint return, and have three dependent children. You can deduct $14,000 ($2,800 x 5) as exemptions from your taxable income. The number of exemption allowances claimed on your tax return is not necessarily the same as the number of exemption allowances claimed on a W-4 form when signing on for a new job. Many times an actor, having been out of work for a long time, might be in desperate need of funds immediately. As a result, he claims nine, 14, or 99 dependents with the expectation of getting all of his pay with little, if any, tax withheld. (Be aware—even if you claim 99 dependents, your employer will withhold Social Security-Medicare at the rate of 7.65% combined.)
Don't Be Under Withheld
By claiming a large number of dependents, you run the risk of being "under-withheld" at tax time. You must realize that, at some point, you'll have to pay the piper. For those of you who claim so many exemption allowances on jobs because you need the money immediately, you must understand that you are using money that is not yours. Inevitably, you'll have to pay your "partner" downtown when you send in your return. The result of bad advice is that you could owe a large sum at tax time. If you have someone you can call, who is reliable and knowledgeable, you are indeed fortunate. That person can advise you on which direction to move.
Every job is different. The number of exemption allowances or dependents one claims depends on different factors. For instance, how much are you being paid? What kind of year have you had so far? Is the job at home or out-of-town? Are you getting a per diem? A tax consultant can give you advice on how many to claim on a job, based on his knowledge and expertise. Otherwise, it's a crapshoot.
The Marriage Penalty
Allow us to explain a concept that baffles some, and annoys most, married taxpayers. We are referring to the "marriage penalty." This "penalty" occurs when the tax a couple must pay on a joint return exceeds the combined amount they would pay if they were single and filing individual returns. The "marriage penalty" generally applies when each spouse earns a substantial share of the combined income. On the other hand, if one spouse has little or no income, there generally is a marriage "bonus," in that the spouse with most of the income pays a lower tax as a married person filing jointly, than if he or she were single. Congress has considered various proposals in recent years to provide at least partial relief for the marriage penalty, but none have as yet been enacted.
This concept applies when married people file jointly. In most instances, you cannot avoid higher taxation by filing separately. The results are usually worse due to higher rates and more limitations in that status.
Withholding on Unemployment Compensation
We must take a moment now to remind our readers of a very important development that first occurred quite a few years ago and still is unknown to many actors. We are referring to the fact that you can choose to have Federal income tax withheld from any unemployment compensation you get. To make this choice, you will have to fill out Form W-4V, Voluntary Withholding Request, and give it to the unemployment office when you make your claim. The amount withheld will be 15% of each payment.
Deducting Student Loan Interest
We are happy to remind our readers about a relatively new and powerful deduction available again this year. If you paid interest on a qualified student loan in 2000, you may be able to claim a deduction directly against your income of up to $2,000—up from $1,500 last year. This deduction cap will increase to $2,500 by 2001!
Getting Good Help
Many times during the tax season, we get frantic calls from actors wanting to know how to find the proper consultant to do their taxes. These calls usually come from people who have had bad experiences with so-called experts in the previous year. Let us tell you how to find the "right" theatrical tax consultant, so you can have your return prepared properly and intelligently, and then live with yourself peacefully after it is sent in.
You are an actor or actress. You go to classes. You're in a show with other people like yourself. You work Off-Broadway. You certainly are going to meet actors who have been in the business longer than you have. For goodness sake, ask them where they have been going for years. If a TC is recommended, ask around about him or her. What are the TC's credentials? Will he or she sit and talk with you while your taxes are being prepared and explain everything as you work along? If you get notices from "downtown," will the TC be there for you?
Find out about a TC's reputation before you go to him. An actor opens so many wrong doors during the year, doesn't he? You make sure the door you open to your tax man is the right door. As we said in our very first column, many years ago, "When you go to a tax consultant to have your taxes prepared, he must make money for you. If he can't, lose him." If the fellow is going to make money for you with his knowledge and expertise, it won't cost you anything. To sum it up: go where the winners go!