Hobby Income: The IRS Says You Must Declare ItNews
Posted in on March 2, 2018
Many people enjoy hobbies and sometimes those hobbies will actually end up earning them a little money. If your hobby does turn a profit, you likely will need to declare the income with the IRS. If you fail to declare the money that you made from your hobby and the IRS discovers you had earnings you didn't pay income tax on, you could find yourself facing legal trouble. A Maryland tax attorney can help you to understand the rules for declaring hobby income, deducting expenses from a hobby, and determining when your hobby becomes a business and why it matters.
Declaring Income to the IRS That You Earned From a Hobby
The IRS wants to know about all income you earn, so even if you made a minimal amount of money from your hobby, it is important to declare the money that you made. For most people, the income they make from their hobby should be declared on Line 21 of their 1040 form, which is the part of the 1040 form where you can declare other income.
You are, however, allowed to deduct expenses to offset the income from your hobby. Deductions that you take for spending on your hobby cannot exceed the amount of income you claim from your hobby, so you should be careful not to try to write off hobby expenses because this could create a risk of an audit.
For example, if your hobby is knitting scarves and you make $500 but you spend $400 on the yarn, you'd need to declare the $500 in income but could also claim $400 in expenses so you'd only have to pay taxes on an additional $100 in income. However, if you spend $550 on the yarn, you'd only be able to deduct up to the $500 you earned from your knitting hobby. You would not have to pay any additional taxes since your expenses would wipe out the profits and you wouldn't have actually earned any money from the hobby --- but you wouldn't get to fully deduct all of your expenses.
You also need to itemize on your taxes in order to deduct your expenses from your hobby. Unfortunately, your hobby expenses and other expenses are only deductible if they add up to at least two percent of your income, which is not the case for many people. If you don't itemize, you'd have to declare hobby income but wouldn't be able to deduct expenses. Since tax reform almost doubled the standard deduction, many people will find it no longer makes sense to itemize in 2018, so the ability to deduct hobby expenses may disappear.
Many people try to classify their hobby as a business so they can deduct all of their expenses by declaring they suffered business losses. However, this could lead to legal trouble because your hobby does not become a business just because you decide it's a business. You should reach out to Kevin Thorn, a Maryland tax attorney, to find out if your hobby could be considered a business and to learn more about how hobby income is taxed.Share This Post