Wednesday, August 6, 2014

Five Basic Tax Tips about Hobbies

Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship.

You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are five tax tips you should know about hobbies:

1. Is it a Business or a Hobby?  A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider nine factors when you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation. For more about ‘not-for-profit’ rules see Publication 535, Business Expenses.

2. Allowable Hobby Deductions.  Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

3. Limits on Hobby Expenses.  Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.

4. How to Deduct Hobby Expenses.  You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.

5. Use IRS Free File.  Hobby rules can be complex and IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $58,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the website.

For more on these rules see Publication 535. You can get it on or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:


Jim Tracy said...

If you don't know a lot about taxes, is it good to hire a tax accountant to help you out? Or will they try to rip you off? I've never had experience with it before.

Jim Tracy |

Kenneth Reid said...


As an accountant, and a tax preparer myself, I don't know how people can prepare their own tax returns, unless they are very simple. The tax code is extremely complex, and gets more complex every year. Lots of people who prepare their own tax returns make a lot of mistakes on their returns, and the IRS will come after them to audit their returns.

It would be best if people (especially those people who are self-employed, or have complex returns) would go to a tax accountant to have their returns prepared. It may not be "cheap", but in most cases, the expense is worth the cost (in peace of mind). One has to remember that not all accountants (including CPAs) prepare tax returns. There are accountants (and CPAs) that go to another accountant (or CPA) to have their tax returns prepared for them.

Most tax accountants will be fair with their pricing. The biggest rip-offs that you will find are usually the national chain tax preparation firms. Most of these firms are only open during tax season, and are not available during the rest of the year to represent you before the IRS or your state, or to answer questions that you might have during the year. A good tax accountant is open year round, and is available to answer your questions and/or to represent you (should the need arise).