Tips for taxpayers who make money from a hobby

Many people enjoy hobbies that are also a source of income. From painting and pottery to scrapbooking and soap making, these activities can be sources of both fun and finances. Taxpayers who make money from a hobby must report that income on their tax return.

However, the rules for how to report the income and expenses depend on whether the activity is a hobby or a business.

There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five things to consider:

If the activity is a business or a hobby.
If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby. They should base their determination on all the facts and circumstances of their activity.

Allowable hobby deductions.
Taxpayers can only deduct ordinary and necessary hobby expenses:

  • Ordinary expense is common and accepted for the activity.
  • Necessary expense is appropriate for the activity.

Limits on hobby expenses.
Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.

How to deduct hobby expenses.
Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Taxpayers can look into this now to determine if they will itemize their deductions when they file their 2019 tax return next year. Expenses may fall into three types of deductions, and special rules apply to each type.

IRS Withholding Calculator can help workers have right amount of tax withheld following tax law changes

Following the biggest set of tax law changes in more than 30 years, the Internal Revenue Service continues to remind taxpayers to do a Paycheck Checkup to help make sure they are having the right amount of tax withheld.

The Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December 2017, changed the way tax is calculated for most taxpayers. By visiting the IRS Withholding Calculator, available on IRS.gov, taxpayers can make adjustments following recent tax laws that may affect them, including the larger standard deduction, the increased Child Tax Credit or Other Dependent Credit.

Most TCJA changes took effect in 2018 and, for most taxpayers, affected the return they filed earlier this year. Those changes will also apply to 2019 tax returns filed in early 2020.

Among other things, the new law suspended the personal and dependency exemptions taxpayers claimed in the past. It also made the Child Tax Credit for dependent children, under the age of 17, available to a broader range of taxpayers by doubling the maximum credit from $1,000 to $2,000 per qualifying child and substantially raising the income limits that apply. Because TCJA nearly doubled the standard deduction, fewer taxpayers need to itemize their deductions and new restrictions apply to many of these deductions, such as state and local taxes, mortgage interest and miscellaneous itemized deductions.

As a result, some taxpayers ended up receiving 2018 refunds that were larger or smaller than expected, while others unexpectedly owed additional tax when they filed earlier this year. Those taxpayers may need to raise or lower the amount of tax they have taken out of their pay throughout the year.

The Withholding Calculator enables taxpayers to get their tax withholding right by making sure these and other tax changes are built into their take-home pay. Taxpayers enter their deductions and credits into this handy online tool, and estimate income from other sources, such as jobs their spouses hold, bank interest, second jobs and gig-economy work. To use the Withholding Calculator most effectively, taxpayers should have a copy of the 2018 tax return due earlier this year, as well as recent paystubs for themselves and their spouses, if married and filing jointly.

The Withholding Calculator will recommend the number of allowances the employee should claim on their Form W-4. In some instances, it will recommend that the employee also have an additional flat-dollar amount withheld from each paycheck.

Though primarily designed for employees who receive wages, the Withholding Calculator can also be helpful to some recipients of pension and annuity income. If the Withholding Calculator suggests a change, the employee should fill out a new Form W-4 and give it to their employer as soon as possible. Similarly, recipients of pensions and annuities can make a change by filling out Form W-4P and giving it to their payer. They should not send these forms to the IRS.

Taxpayers should also check their withholding any time they have a major life change, such as getting married, getting divorced, having a baby, adopting a child, buying a home, retiring or starting college. Anyone who needs to make a withholding change should do so as soon as possible. This way if a tax withholding adjustment is needed, the amount of tax that needs to be withheld can be spread across more paychecks remaining in the year. Waiting means the remaining tax owed will need to be withheld from fewer paychecks so more will have to be taken from each one.

Here’s what taxpayers should know about making 2019 estimated tax payments

mall business owners, self-employed people, and some wage earners should look into whether they should make estimated tax payments this year. Doing so can help them avoid an unexpected tax bill and possibly a penalty when they file next year.

Everyone must pay tax as they earn income. Taxpayers who earn a paycheck usually have their employer withhold tax from their checks. This helps cover taxes the employee owes. On the other hand, some taxpayers earn income not subject to withholding. For small business owners and self-employed people, that usually means making quarterly estimated tax payments.

Here’s some information about estimated tax payments:

  • Taxpayers generally must make estimated tax payments if they expect to owe $1,000 or more when they file their 2019 tax return.
  • Whether or not they expect to owe next year, taxpayers may have to pay estimated tax for 2019 if their tax was more than zero in 2018.
  • Wage earners who also have business income can often avoid having to pay estimated tax. They can do so by asking their employer to withhold more tax from their paychecks. The IRS urges anyone in this situation to do a Paycheck Checkup using the Tax Withholding Estimator on IRS.gov. If the estimator suggests a change, the taxpayer can submit a new Form W-4 to their employer.
  • Aside from business owners and self-employed individuals, people who need to make estimated payments also includes sole proprietors, partners and S corporation shareholders. It also often includes people involved in the sharing economy.
  • Estimated tax requirements are different for farmers and fishermen.
  • Corporations generally must make these payments if they expect to owe $500 or more on their 2019 tax return.
  • Aside from income tax, taxpayers can pay other taxes through estimated tax payments. This includes self-employment tax and the alternative minimum tax.
  • The final two deadlines for paying 2019 estimated payments are Sept. 16, 2019 and Jan. 15, 2020.
  • Taxpayers can check out these forms for details on how to figure their payments:
  • Taxpayers can visit IRS.gov to find options for paying estimated taxes. These include:
  • Anyone who pays too little tax through withholding, estimated tax payments, or a combination of the two may owe a penalty. In some cases, the penalty may apply if their estimated tax payments are late. The penalty may apply even if the taxpayer is due a refund.
  • For tax year 2019, the penalty generally applies to anyone who pays less than 90 percent of the tax reported on their 2019 tax return.

Interactive tool on IRS.gov helps taxpayers get answers to their tax questions

Tax questions can pop up at any time of the year. When people need answers, they should start with the Interactive Tax Assistant on IRS.gov. It’s a tool that provides answers to many tax law questions.

The taxpayer enters answers to a series of questions and the tool gives them a response based on those answers. Here are some of the topics covered:

Filing Requirement

Filing Status, Dependents, and Exemptions

Retirement: Pensions, IRAs, Social Security

Other Income

Deductions

Credits

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Tips for taxpayers who make money from a hobby

Many people enjoy hobbies that are also a source of income. From painting and pottery to scrapbooking and soap making, these activities can be sources of both fun and finances. Taxpayers who make money from a hobby must report that income on their tax return.

If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby. They should base their determination on all the facts and circumstances of their activity.

If a taxpayer receives income for an activity that they don’t carry out to make a profit, the expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted. The taxpayer must still report the income they receive on Schedule 1, Form 1040, line 21.

More Information:
Publication 334, Tax Guide for Small Business
Publication 525, Taxable and Nontaxable Income
Publication 529, Miscellaneous Deductions
Publication 535, Business Expenses
Publication 17, Your Federal Income Tax
About Schedule C, Profit or Loss from Business
Estimated Taxes

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While the federal income tax-filing deadline has passed for most people, some taxpayers did not file an extension and still have not filed their tax returns. These taxpayers should file ASAP.

A taxpayer might at some point see the IRS make a decision about their taxes. If the taxpayer disagrees with this decision, they have the right to appeal it. The right to appeal an IRS decision in an independent forum is one of 10 basic rights known collectively as the Taxpayer Bill of Rights.

Here are some facts taxpayers should know about the right to appeal an IRS decision:

  • Taxpayers have the right to a fair administrative appeal of most IRS decisions.
  • There is an independent office called the IRS Office of Appeals. This office is separate from the IRS office that first reviewed the case.
  • Generally, the Office of Appeals will not discuss a case with the IRS.
  • Taxpayers also have the right to receive the Office of Appeals’ decision in writing.
  • Taxpayers generally have the right to take their cases to court.
  • Your Appeal Rights and How to Prepare a Protest if You Don’t Agree is a publication that explains how a taxpayer can appeal a tax case when they disagree with the IRS’s findings.
  • If the IRS sends a notice proposing that the taxpayer owes more money, the taxpayer may want to dispute it. If so, the taxpayer may file a petition with the United States Tax Court.
  • Some taxpayers may have a claim for a refund. These taxpayers may take their case to their United States District Court or to the United States Court of Federal Claims. Generally, the taxpayer must file this claim two years from the date of the IRS notice denying the taxpayer’s refund.

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Taxpayers who still haven’t filed their 2018 tax return should do so ASAP

While the federal income tax-filing deadline has passed for most people, some taxpayers did not file an extension and still have not filed their tax returns. These taxpayers should file ASAP. They should do so even if they can’t pay to avoid potential penalties and interest, which can continue to add up quickly.

Here are some things taxpayers in this situation should know:

  • Penalties and interest are only added on unfiled returns if the taxpayer did not pay taxes by the April deadline. Taxpayers who did not file and owe tax should file a tax return and pay as much as they are able to now. If they cannot pay the full amount, they should learn about payment options. These can reduce possible penalties and interest added to the amount the taxpayer owes.
  • IRS Free File is available on IRS.gov through October 15.
  • Some taxpayers may have extra time to file their tax returns and pay any taxes due. These include:
    o Some disaster victims 
    o Military service members and eligible support
    personnel in combat zones 
    o U.S. citizens and resident aliens who live and work 
         outside the U.S. and Puerto Rico
  • If a return is filed more than 60 days after the April due date, the minimum penalty is either $210 or 100 percent of the unpaid tax, whichever is less. Therefore, if the tax due is $210 or less, the penalty is equal to the tax amount due. If the tax due is more than $210, the penalty is at least $210.
  • The IRS provided penalty relief for certain taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.
  • Other taxpayers filing after the deadline may also qualify for penalty relief. Those who are charged a penalty may contact the IRS and explain why they were unable to file and pay by the due date.
  • Taxpayers who have a history of filing and paying on time often qualify for first-time penalty abatement.
  • There is no penalty for filing late if a refund is due.

 

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