Author: Leon Clinton

Tips for Taxpayers Who Make Money From a Hobby

Many people enjoy hobbies that are also a source of income. From soap making to pottery and jewelry making to calligraphy, 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.

Generally, if someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, and not to make a profit.

Taxpayers should consider the following nine factors when determining whether their activity is a business or a hobby and base their determination on all the facts and circumstances of their activity. No one factor alone is decisive, however, and it is important to consider all of these factors when deciding whether an activity is a business engaged in making a profit.

1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
2. Whether the time and effort you put into the activity indicate you intend to make it profitable.
3. Whether you depend on income from the activity for your livelihood.
4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
5. Whether you change your methods of operation in an attempt to improve profitability.
6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
7. Whether you were successful in making a profit in similar activities in the past.
8. Whether the activity makes a profit in some years and how much profit it makes.
9. Whether you can expect to make a future profit from the appreciation of the assets used in the 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 considered miscellaneous itemized deductions and cannot be deducted for tax years 2018 through 2025. The taxpayer, however, must still report income they receive on Schedule 1, Form 1040, line 21.

If you have any questions about whether your hobby is actually a business in the eyes of the IRS, don’t hesitate to call.

• By Leon Clinton
• February 26, 2020

Figuring out Your Correct Filing Status

Your filing status determines which tax forms you need to file, the amount of your standard deduction, eligibility for certain tax credits, and how much tax you owe. In some cases, it may even impact whether you need to file a federal income tax return.

Single, married, divorced? Kids or no kids? These are just a few of the questions that help you figure out your correct filing status when filing your income tax return. While the most common filing statuses are “Single,” “Married Filing Jointly,” and “Head of Household,” there are five different filing status options listed on a federal tax return. Here are the five:

1. Single. Single filing status generally applies if you are not married, divorced or legally separated according to state law.

2. Married Filing Jointly. A married couple may file a return together using the Married Filing Jointly status. If your spouse died during 2019, you usually may still file a joint return for that year.

3. Married Filing Separately. If a married couple decides to file their returns separately, each person’s filing status would generally be Married Filing Separately.

4. Head of Household. The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.

5. Qualifying Widow(er) with Dependent Child. This status may apply if your spouse died during 2017 or 2018 and you didn’t remarry before the end of 2019, you have a dependent child and you meet certain other conditions.

Sometimes more than one filing status applies, so it is important to work with a tax professional that can help you figure out which filing status is more beneficial, resulting in the lowest amount of tax owed. Something else to keep in mind is that your marital status on the last day of the year is your marital status for the entire year, so if your divorce is not final on December 31, you are still considered “married” for the 2019 tax year. If you have any questions about filing status, please call.

• By Leon Clinton
• February 23, 2020

Student Loans: Cancellation of Debt Relief

Taxpayers who took out federal or private student loans to finance their attendance at a nonprofit or for-profit school now qualify for safe harbor with regard to cancellation of debt income for discharged student loans. Relief is also extended to any creditor that would otherwise be required to file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure.

Background

Previously, the Treasury Department and the IRS provided relief for federal loans discharged by the Department of Education under the Closed School or Defense to Repayment discharge process, or where the private loans are discharged based on settlements of certain types of legal causes of action against nonprofit or other for-profit schools and certain private lenders. However, this relief is now extended to taxpayers who took out federal and private student loans to finance attendance at nonprofit or other for-profit schools not owned by Corinthian College, Inc. or American Career Institutes, Inc.

What this means for taxpayers

Under the safe harbor, taxpayers should not report the amount of the discharged loan in gross income on his or her federal income tax return. Additionally, the IRS will not require that a creditor must file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure.

Questions? Don’t hesitate to call.

• By Leon Clinton
• February 21, 2020