The Civic Impact of Taxes

This post originally appeared in Hyperallergic on March 15, 2019. 

Taxes are our only mandatory civic duty : So why is tax education left out of civics? 

You probably recall a school lesson in your past about our “bicameral legislature” or the “separation of powers” between our three branches of government. But did you ever get a lesson in graduated income tax rates, the personal exemption, or how freelancers pay into Social Security?

When the president tries to extract a pledge of loyalty from someone in the Justice Department, an alarm goes off about those “separation of powers,” and as a citizen, you understand a basic tenet of our democracy is being tested. But what about when states propose funding budget shortfalls by increasing the sales tax (which is one of our most regressive taxes), or politicians quietly double the threshold on the estate tax (one of our most powerful tools for fighting the widening wealth gap)? Do these actions trigger the same sense of alarm?

Our founding fathers recognized that the maintenance of our democracy would require a population educated in basic civic responsibility. The establishment of a public school system was a part of this understanding — without public education, civic education would be reserved for the wealthy, and the uneducated masses would be subject to the whims of tyrants. Public schools and civic education have been a deliberate cornerstone of our democracy since the American Revolution.

We should all be educated in the basic structure and functions of our government so that we can advocate for ourselves, and keep our democracy healthy. While civic participation is not as robust as it could be, it exists. People do vote; they do advocate for different policies and appeal to their legislators, or run for public office themselves. So why in our democracy is the one part of civic engagement that is mandatory — paying taxes — not also a part of our basic civic education?

From my vantage as a tax accountant for artists, I can see how acute this lack of information is. In my tax practice, I regularly explain the basic mechanics of tax-sheltered retirement plans and clear up the near constant confusion between itemized deductions and the business deductions one takes on one’s Schedule C. I give workshops to packed room after packed room of professional artists who have never had a lesson on how self-employment tax works, how to pay estimated quarterly taxes or how their self-employment tax pays into Social Security and Medicare. 

I say this with deep respect. Artists and creative professionals are generally better educated and more civically engaged than the average citizen. So, if this population is under-informed on basic tax issues, I think the problem is much bigger. I think we have a civic education crisis.

Again, the point of civic education is to cultivate an engaged, participatory population. One that engages in honest, intellectually rigorous debate and makes good faith arguments about fairness and the society we want. And what place is more important than the mandatory civic engagement of tax-paying? What shapes our society more than the money we all pay into it? What is more worthy of scrutiny than who pays a disproportionate share of their income compared to everyone else, and why? What is a more important civic question than how our tax dollars are apportioned? What is a more fundamental civic question than what kind of society do we want to build with our tax dollars? 

I see a direct link between the general lack of understanding of our tax code and the thorough lack of advocacy on the part of the people most affected by it. Without this education in how our tax system is structured and who pays what proportion of their income, we can’t engage in shaping a fairer tax policy. When politicians lie about who pays taxes, these lies don’t get called out properly, because they aren’t obvious to everyone. When regressive tax policies are floated — such as increases to sales tax, which are disproportionately paid by the poor, people often don’t realize that these taxes are regressive, so fairer alternatives don’t get surfaced. The estate tax (the “death tax” label is dishonest) — which is a clear solution to a widening wealth gap, based on centuries of evidence and decades of policy work, gets chipped away at constantly, without enough defenders rising up to support it. 

As the massive new tax law changes were being passed, I kept wondering why were people not more up in arms over:

–the dramatic reduction in charitable contributions that would likely result from doubling the standard deduction

–the punishing of electorates in high-tax states with the capping of state and local income tax deductions and

–the boon provided to the wealthiest families in the US by doubling the estate tax exemption. In 2017, before the tax law change, only 5,500 estates paid any estate tax. The Tax Cuts and Jobs Act of 2017 is expected to reduce that number to 1,900).

All of these policies are the opposite of what most Americans want. Polling from the months before the passage of the bill made clear that Americans want higher — not lower — taxes on the wealthy and on corporations. But where was the debate? The bill was passed with breakneck speed – that is one reason for the lack of debate. But was our society’s general lack of tax education another reason?

But there’s hope. I want to tell a story of a tax victory won by artists. The last time a tax bill this big was passed was The Tax Reform Act of 1986. In that law, Congress forced artists, writers and performers to portion out the costs of producing their work and take the expenses on their taxes only when that work was sold. The law was so broad that even small amounts of material were to be accounted for in this way — so a painter was supposed to calculate the amount of paint she used on one canvas, and then only take that expense on her taxes when that painting sold. This left artists with an accounting nightmare as well as a dramatic reduction in their ability to claim expenses. Julia Child, the author and chef, protested the ridiculousness of the provision by saying, “How do I allocate the oregano?” 

But the part I love is that we won. Artists understood the impact of this law, and they organized and protested. And what’s more, when the resulting law change did not go far enough, they stuck with it, protested more and got it changed again. The result is that independent artists, writers and performers no longer have to keep inventory. We are allowed — by the sweat of our protesting peers — to expense all of our supplies in the year we buy them. 

So disengaging and accepting our fate is not a given. Correcting unfair tax laws is possible. But first, we do need to understand the laws.

I personally do a lot of education on taxes. But the problem is nationwide. And I’m just using the tools I have — I don’t think it’s the role of business to fill this gap. This is a failure on a societal level that needs a policy solution.

When we have the education, we make better decisions, and we stop unjust laws from being passed. But when we check out or succumb to the idea that taxes are too complicated, we leave the laws to be crafted by lobbyists for well-funded groups that typically have a lot to gain.

Everyone pays taxes. That is the one civic engagement with the most participation, and taxes are at the root of all other policies. Our advocacy won’t be possible until we understand how we pay, who pays what, and who is getting the worst impact. We need tax education so we can better engage as citizens.

DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone. 

If you DO want to track your inventory, Artwork Archive is an excellent tool for tracking your art inventory. And yes, this is an affiliate link, because I think it is a good product.

The Nitty Gritty: How To Prepare for Filing Your Taxes

This article originally appeared on Art F City and was updated 1/21/22.

Nobody likes filing taxes. But thinking ahead and getting your documents lined up reduce the stress of the process. Here are some key ways to prepare yourself for tax season, and get you ready to sit down to your own tax prep software or deliver an organized package to your tax preparer.

1. Download a current tax year organizer. There are many available online. Here’s one from TurboTax. This will be your guide and checklist, and will help you see what’s you still needed, and tell you when you’re done. Follow this guide.  Every accountant has a horror story about someone who, in an the attempt to save themselves time, doesn’t read the organizer carefully, and causes no less than six follow up phone calls to chase down the information. Believe me when I tell you that a busy accountant in the heat of tax season will charge you extra for that kind of hand-holding. If you want to save yourself time (and money) on the tax process, have these materials fully prepared before heading to your accountant. 

2. Put your receipts, 1099-MISCs, W-2s and all your other tax documents in a folder. This can be virtual or manilla. But keep in mind that there is a lot of sensitive personal information in your tax documentation – so wherever you are storing your documents online, be sure you’re using a high security password. Never email sensitive information – you can grant access to your accountant through your secure system (Dropbox, Google Drive, etc.), or you can use theirs. (I use Canopy.) As your various tax statements arrive in the mail, drop them or scan them into this folder.

3. Ask yourself if your address has changed this year or last.  If your address has changed this year or last, it has, immediately call your employer, bank, taxing authority or anyone who will be issuing you a tax document – and make sure they have your current address on file. Outdated or incorrect mailing addresses are the chief culprit for missing documents. You should, by law, receive all of your 1099-MISCs and W-2s by January 31. If you don’t, call the sender.

4. Ask yourself if you’ve had a baby this year. (This won’t be difficult to answer.) If you’ve had a baby in the last year, and haven’t yet received their social security card, check in with the Social Security Administration. New legislation means you can no longer amend a prior year return to receive the Earned Income Tax Credit for years that your child didn’t have a social security number.

5. Don’t bother making medical expense calculations, unless you’ve had a lot of costs this year. Save yourself some time on medical expense calculations by knowing you probably can’t take any deduction. Generally, medical expenses can be deducted only by those who itemize deductions, and are older or who had a catastrophic health event. So unless one of those situations apply to you, you don’t need to bother tallying up your medical expenses for the year.

(More specifically, you can’t take any deduction if you take the Standard Deduction, or if your medical expenses were under 7.5% of your adjusted gross income (AGI). For a 35 year old with an adjusted gross income of $50,000, this means you can only deduct your medical expenses over $3,750 (7.5% of $50,000). So if you had $6,000 in medical expenses, you can deduct $2,250 of them ($6,000 – $3,750 = $2,250).

6. Tally up your total income and expenses in each category from your freelancing/arts business. For many of the arts workers reading this, you will be filing a Schedule C for your freelance income or your arts business. Organizing for your Schedule C means you have to finish your bookkeeping for the year. If you use bookkeeping software, run a Profit and Loss report for the year, and include that with your tax documents. But you’re not done there. In all cases, you will need to gather and tally up the total amounts for your income, including your 1099s (and please note which income items you received/are providing 1099s for, and which you are not – you don’t want your tax preparer double-counting your income). List the total amounts for each of these expense categories:

• advertising/marketing

• asset purchases (such as phones, computers, or equipment)

• contract labor

• dues or subscriptions

• insurance premiums (including health)

• legal and accounting fees

• meals/entertainment

• postage

• printing

• professional development

• repairs

• rents

• supplies

• taxes and licenses

• telephone & internet

• travel

• utilities

• website hosting

•  for home office, provide:

  • total square footage of your home and

  • the square footage of your office space

  • Please indicate the date you began using your home office for business

• If you use your vehicle for business purposes:

  •  indicate the date you began using your vehicle in your business, and

  • either: a) the total actual expenses, such as gas, repairs, lease payments, etc.,

  • or b) both total miles and business miles driven this year

Let me take a moment to clarify a common misconception. While you definitely want a clear and detailed breakdown of your expenses for your own books, you do not need to lay out more detail than this in order to do your tax return. Your books are for your records and for the health of your business. If you are audited, you will need to show them to the IRS. But for the purposes of preparing your taxes, you need only the totals in each category. Taxes are the “Cliff’s Notes” of your financial picture – they should accurately capture all of the plot points. But the finer-grained details will remain in your books.

7. Don’t show me, or any other accountant, your receipts. While the law requires you to maintain all your receipts, your accountant will burn you in effigy if you actually bring them in. They stay in your records. Your accountant will likely have you sign paperwork testifying that you have all the receipts to back up your claims. She, or your spreadsheet, in the case of TurboTax, wants to see only the category totals in order to prepare your tax return.

8. Note any estimated tax payments you made throughout the year. List these by quarter. You want to make sure you’ve been properly credited for any tax payments you’ve already made.

9. Consider maxing out your retirement savings plans to reduce that taxable income. The contribution limit to a traditional individual retirement account (IRA) for tax year 2021 remains at $6,000. If you’re over 50, there is an additional catch-up contribution allowed of $1000. You don’t need to contribute to your IRA until April 15, 2022 for it to count in 2021. For the average taxpayer, putting money in a traditional IRA is their greatest point of leverage in tax savings (as well as retirement saving). So give it some thought before you’re in a tax-deadline panic.

Here’s a grossly simplified* illustration: Let’s say your adjusted gross income is all from self-employment income and is $100,000. Your federal tax rate is 25%, your state tax rate is 5%, and your self-employment tax is 15.3%. You will pay

$100,000 x 45.3% = $45,300 in tax.

Now let’s say you max out your traditional IRA with a $6000 contribution. You will pay 45.3% tax on $94,000 (that’s $100,000 – $6,000, because the contribution lowers your taxable income dollar for dollar). So that’s:

$94,000 x 45.3% =$42,582 in tax.

You saved $2,718 in taxes.

So effectively, while you contributed, on paper, $6,000 to your traditional IRA, you only had to use $3,282 of your money to do it. The government has given you $2,718 extra dollars to grow (with compound interest!) in your retirement fund.

10. Disclose all money you had in foreign bank accounts during the year. The law has tightened up on offshore accounts, and failure to disclose yours comes with a severe penalty. If you had any money in a foreign bank account during the tax year, you’ll need to provide the foreign bank account information – location, name of bank, account number, peak value of account during the year. The “nonwillfulness” penalty (“Whoops! I genuinely didn’t realize I was required to report this!”), is up to $10,000, but the “willfulness” penalty (“I was trying to hide the fact that I have an overseas bank account by not reporting it!”) has a ceiling of $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater.

11. Finally, remember that finishing up your annual bookkeeping and gathering your tax materials takes some effort. Accountants get busier with every passing week of the tax season. And gathering your materials may reveal other errands – like chasing down a missing 1099 or opening a new IRA account. So reduce your stress by setting aside some time, and getting things together as early as you’re able. You’ll feel better that you did.

*I’VE ELIMINATED THE STANDARD DEDUCTION, THE PERSONAL EXEMPTION, THE DEDUCTION FOR HALF OF YOUR SELF-EMPLOYMENT INCOME, THE PRESENCE OF DIFFERENT RATES FOR CAPITAL GAINS, ASSUMING THERE’S NO INCOME FROM SOURCES NOT SUBJECT TO SELF-EMPLOYMENT TAX, AND MAKING UP A TOTALLY THEORETICAL 5% STATE TAX RATE, AS WELL AS NIXING THE SUBSTANTIAL COMPLEXITY OF THE GRADUATED INCOME TAX SYSTEM. SO LIKE I SAID – GROSSLY SIMPLIFIED.

New Series: NFT Fridays

A collaboration between artist/programmer team Hannah Cole (of Sunlight Tax) and Aubrey Holland (who also happen to be married)

Hello everyone, today we’re restarting our series of posts on NFTs for artists and creators. We have big plans, but what we’re kicking off today is a series of Instagram posts we’re calling NFT Fridays as well as a newsletter you can join to get more detailed guides as we chart our journey from NFT beginners to creating and marketing our own series of NFTs. At the end of that journey you’ll be armed with enough information to decide if NFTs make sense for you, have all the tools you need to get started with them, and even have a free NFT from the collection we’re creating. If you’d like to join, click the link at the end or the one right here.

Before you ask, we’re well aware that you may have concerns about NFTs, and our first few posts will cover them in detail. If you have specific concerns, drop them in the comments and we’ll be sure to address them. Our belief is that there’s enough good here for many artists to benefit from, and that with a few resources we can bring more art to a world crowded with hype, noise, and ape avatars. This is going to be an interactive journey, so please let us know what’s on your mind and share this with your friends. Have a great weekend!

We are starting a special NFT blog for these posts. We’ll link it through the Sunlight Tax blog, so you can easily find it. But you can also bookmark it directly here.

(The first image above is a Fidenza by @tylerxhobbs, which recently sold for $3.3 million after being minted on the @artblocks_io platform last June. The artist receives 5% of all secondary sales from the series, which have totaled over $150 million to date. The second image is a Chromie Squiggle, also originally sold on @artblocks_io and created by its founder Erick AKA Snowfro. These are both examples of generative art, which are automatically created by software, but not all NFT projects require technical knowledge)

Getting Organized: Financial Resolutions for Artists

This article originally appeared on Art F City and was updated 8/16/21.

As we enter the new year, let’s take time to think about the priorities in our arts practices, and in our personal lives. You may roll your eyes at the idea of New Year’s resolutions, but there is evidence that writing down your goals actually helps you achieve them. So grab a pen, and let’s put some intention into this next year of our lives.

In my interview with artist Susan Crile about her eight year ordeal defending herself in US Tax Court, there was a lot of discussion about keeping records to prove the profit motive in one’s art practice. It brings up a good question for most of us: how are we doing on our own record keeping? If the IRS sent an audit letter tomorrow, would you feel good about the shape that your records are in? If the answer is not good, don’t panic. Here is a list of what you will need, and some thoughts on how to improve your record keeping going forward.

• Good Bookkeeping. Bookkeeping is important to any business. Without tracking expenses and growth, there is no way to improve your practice. It’s impossible to argue that you are actively trying to turn a profit when you don’t track your income and expenses. Not only is keeping an accurate set of books a legal requirement for your arts practice, but it can help you by generating reports to show you how you are using your resources, and these reports can be the documentation you need to get loans, make budgets, and apply for grants. In short, bookkeeping is worth all the investment of time we put into it and then some. If you have a simple business without a lot of transactions, say, you sell about 10 paintings a year, then a spreadsheet may be all you need. If your operation is more complex, you’ll need more robust software. Before picking the cheapest software, think about how your business may grow in the next five years, and what you may need. Do you need software that can integrate with a ticket sales system or an Etsy shop? Do you think you may hire an employee? Do you need invoicing? Do you want to do it all yourself, or would you like a system that a bookkeeper or accountant can easily access? Quickbooks is the old standby, but it can be confusing for those without an accounting background. There are lots of alternatives, ranging from free to expensive, and all with different strengths. Xero is a cloud-based accounting software that has a clean design, is user-friendly, and works on mobile. No matter which you choose, make sure you have a good bookkeeper set it up for you, and give you a thorough tutorial on how to make entries correctly. It is worth some up front cost to have a professional set you up because you’ll be basing business decisions off the numbers in your books.  Bookkeeping errors can lead to costly mistakes not to mention the hefty expense of having a professional clean your books up..

• Good bookkeeping is a question of habit. So schedule a regular time to do it. This is why the design of Money Bootcamp includes quarterly bookkeeping co-work sessions. The point is that you need to establish the habit of sitting your butt down to do your books at least every quarter.

• Save receipts. The law says that if you can’t produce the receipt to prove it, it never happened, and you can’t deduct the expense. Your bank statements or credit card statements aren’t enough. For meals, the documentation requirement is even stricter: the receipt must be accompanied by the name of the business contact you are meeting with, plus the reason for the meeting. A receipt alone will not suffice. Personally, if I don’t grab a pen and jot these things down at the moment I am handed the receipt, I will never do it. So that has become my personal habit – I write directly on my receipts, and then save them in a file folder. You can also pair the receipt with an entry in your calendar that states who you met with and what the business purpose was.
  
  Some people are handy enough with their phones that they snap a picture of every receipt (many accounting softwares integrate a receipt-saving feature like this, and there are stand alone apps dedicated to it). I am not fast enough with my phone for this to work for me, but if you are, it is a great method for keeping your receipts.

• Tracking mileage. I went over the details of mileage tracking in my Miami travel expense post. But here’s a tip: go out and record your car’s odometer reading right now. And while you’re at it, set an alarm on your calendar to do this the first day of every year. Because tracking your business mileage means not only tracking the number of business miles you drove this year, you also must record your total miles for the year. By recording your odometer on day one, you have both your ending mileage for last year, and your beginning mileage for this year. Two birds. One stone.

• Keeping a calendar. In the days of Google calendar, you probably have one that is pretty good already. But you might not realize that this can be an important document to show your business activity in the event of an audit. Your calendar can be used to show the amount of overall time you spend on your arts practice — and that means everything from making the actual work to networking, marketing, and bookkeeping. Your calendar can also show who you met with and for what purpose. This may corroborate other parts of your documentation, from travel expenses (your calendar shows the meetings you had set up in your travel location), to your meals expenses (meeting the strict substantiation requirement of who you met with and for what purpose).

Maintaining important correspondence shows your effort to grow your career. You may still snail-mail out old-school introduction packets to museums (and be sure to save those receipts if you do!), but you almost certainly reach out to art world people over email. In the days of searchable email, this is a lifesaver. If you use an email folder system, consider saving this correspondence into one place (ie. “gallery + museum correspondence [current year]”), so that in the event of an audit, you can produce this important evidence of your businesslike intentions quickly and without having to rely on your memory.

• Maintaining your arts inventory. In Susan Crile’s drawn-out audit, her professional inventory system weighed heavily in her favor to prove that she was a professional artist and not a hobbyist. How do you track your art inventory? Artwork Archive is a great professional inventory-tracking software (and yes, that’s my affiliate link, where you can get a 20% discount). Having an up-to-date document that shows what you’ve produced and where everything is is an important tool in your arsenal.

While looking at record-keeping goals for our work lives is important, it’s even more important to look at the complete picture. Where do we want to have an impact in the larger world — in our personal lives, and in our communities? If donating money to good organizations hasn’t always been your habit, consider making it a goal this year. There are many organizations doing important work--from good journalism to addressing income inequality issues and more--that could use your support. This is important. Give some thought to the world you want to help shape, and take a moment to write down your charitable giving goals for this year. It feels good, and it reduces your taxable income if you itemize your deductions.

And lastly, remember that we need to budget more than just money. Time is the most limited of all resources – so consider budgeting time to be mindfully present with friends and family, and time for civic engagement. It may end up being the most valuable contribution you make to the world this year.

What's the Deal with Receipts?

Here’s the confusion: You keep hearing that the IRS requires you to keep receipts and documentation for all of your business expenses. So why is your accountant annoyed when you try to hand her your receipts?

Here’s the story. Yes, you are required to keep receipts and documentation to prove each and every one of the business expenses that you deduct. That is the law. And here is the actual gospel, from the IRS itself. And here is a comprehensive list of what New York considers to be legal proof of your expenses. In case it’s not clear - and I get enough questions from people to know that it isn’t - the reason that you need this documentation, besides being a good practice for your actual business anyway, is that should the IRS or your state decide to examine your tax return, this is the proof of expenses they will require you to show them in order for them to allow you to keep those deductions. If you can’t, then you have just lost your deductions, you may have a bad experience, and you will owe them money. You need to save these receipts and documentation for 7 years.

So why is your accountant irritable when you hand over receipts? That is another story. Tax season is super stressful. Most people, despite their intentions, don’t get their tax documents organized until a few weeks before the tax deadline, so your tax accountant has a drinking-out-of-a-firehose situation from about March 1-April 15. A lot of inexperienced taxpayers with freelance income don’t realize that they have a fairly big job to do before they can get their taxes done - that is, they need to do their bookkeeping. They need to tally up their receipts and income, and put it into some basic expense categories. Here’s a beautiful chart to help you with that. You can hire a bookkeeper to do this for you ($30-$60/hour) or, you can join Money Bootcamp, which is designed to teach you how to do it yourself (and have quarterly bookkeeping co-work sessions to keep you on track and up-to-date, along with loads of other valuable financial and tax skills). 

So keeping your books is a requirement if you run a business. And if you’re a freelancer of any kind, though you might not have realized it, you are running a business. 

So showing your accountant your receipts says that you haven’t done your bookkeeping, that you probably don’t realize that you have a sizeable job ahead of you, and that you probably need some coaching about the basic tax rules.

This is totally understandable. You’re just a bespoke latex dog-costume designer, not an accountant! This might even be your first year freelancing. But your accountant is facing an immovable deadline with an obscene flood of work. So if she’s not keeping up with her loving-kindness meditation, she might get grumpy with you. As a person who was new at my arts practice once, and as a tax accountant, I’m advocating for understanding in both directions here.