Never take tax advice from the Internet. This includes from me.
I talk about tax issues a lot here, but I don't give advice. Again, your situation is likely unique and unlike mine. Talk to a tax advisor - it isn't that expensive. For about what you pay to run Turbotax, you can hire someone to do your taxes for you. If your tax situation is very simple, well, then there are no "secret tips 'n tricks" to getting a bigger refund, anyway.
Understanding taxes means not living in a fantasy world. So many people think a tax refund is a "gift" from Uncle Sam and not just their own over-payment being returned to them. In some instances, sure, if you have huge tax credits, they may actually exceed your tax bill. But that doesn't happen often for most middle-class people. Even the Obamacare tax credit is offset by the Obamacare premiums - you aren't making money on that tax credit.
So talk to your tax advisor. I use my Dad's accountant after I helped settle his Estate. She cost about as much as I was paying Turbotax, and it was a lot easier to send her my 1099's as opposed to entering all the data myself and hoping I got things right. It helps to have a second set of eyes on things. Of course, my taxes are getting simpler and simpler as I get older, so maybe down the road I can file 1040-EZ - who knows?
And actually, you can use most online tax software for free, although the companies selling the tax software services don't make this easy to find. They would rather you pay. Of course, when I was in business, I had to use the "Professional" version of Turbotax, which was kind of expensive. Even now, having rental income (and expenses to deduct) my taxes are a little complicated in that I have to file a schedule E, which isn't usually part of the "free" online tax services.
Sadly, there is a lot of click-bait on the Internet about taxes, and "GoBankingRates!" which appears to be a foreign-based text farm, put up one such slideshow today which not only gives bad advice, it gives horrible advice. The biggest boner (and the only one I will address) is in the very first slide - which claims you can "deduct" hobby expenses. Try again.
A business is a business and a hobby is a hobby, and the IRS has definite definitions about this. You cannot deduct expenses for a hobby to offset other income, unless you turn it into a business. In the confusing example they use, the posit that you spend $2000 a year on a woodworking hobby and sell one of your hand-made tables for $1000 - and thus you can "deduct" $1000 from your taxes.
I say this is confusing, as it makes it seem like $2000-$1000 = $1000 so you are deducting a negative profit of $1000 from your income, when in fact all you are doing is zeroing-out your hobby income.
Yes, you can - and should - deduct $1000 from your income to offset the reported $1000 in sales. The net result is $1000-$1000=$0. You are not "saving" money on your taxes at all, just zeroing-out the "income" from the sale of the hand-made table. And if your income from the sale of the table was not reported on a 1099 form, chances are, the IRS really doesn't care much about the entire deal, because not only was your "profit" equal to zero dollars and zero cents, you actually lost money on the deal.
Now, if you want to declare your hobby as a business, you might be able to declare the $1000 in income and deduct $2000 in expenses and show a loss of $1000 for the year - which would reduce your taxable income and create a larger refund. It would also be total audit bait.
On the other hand, a legit business that is showing a loss occasionally, can deduct that loss and perhaps even carry it forward. For example, our rental property was vacant for several months one year and we had to pay $3000 for repairs and painting to get it in shape to rent. This meant that we had a negative income of -$1500 for that year. That loss did offset other income as renting out a condo is not a "hobby".
The rules are inconsistent, to be sure. You can rent out your vacation home so many weeks a year and not declare the income. But beyond that, you do have to declare it. On the other hand, if you sell your vacation home at a loss, you can't deduct that as a capital loss. On the other hand, if you bought a house solely to rent out as a vacation home, then it is a "business" (although you could technically stay there a limited time, particularly if repairs are needed). It gets complicated, so again, a tax adviser is key.
My Mother fell into this trap. She ran a bookstore and showed losses for several years. My Dad took those losses on their income tax, which reduced their tax bill. Problem was, even though it was a "legitimate" business, with a storefront, inventory, employees, and so on and so forth, she was showing losses for several years in a row. This tends to trigger an audit, as the IRS considers any small business that shows losses year after year to be a "hobby business" where someone is writing-off what should be hobby expenses.
Say for example, you like to tinker with old cars. You buy and sell a few old cars, work on them, and have fun. You don't make any money at it, of course, but if you declare it a "business" you can try to write off the rent on the garage space you use, and the cost of tools and car parts and even business meals and travel expenses (to the extent allowed) and of course, declare any income from sale of the completed cars you restore. If you make money at this and pay taxes, this is not a problem - you are a legitimate business and are making a profit.
But, if this is just a hobby of yours and you are showing losses year after year, well, you will get audited and the IRS may dispute the deductions and then assess you with taxes and penalties and interest going back seven years. Hobby businesses are audit-bait, plain and simple. If you want to run a car restoration business, fine. But if you want to take your car hobby and try to claim it as a business, you'll end up in trouble.
Any good tax advisor will tell you that, too. Not only do tax advisors - the good ones, anyway - know what you can and cannot deduct and how to fill out the forms properly, they know what is an isn't audit bait for the IRS. For example, home office deductions are now commonplace - provided you are running some sort of legit home business (and not just working from home while employed by someone else's business). But not a few years ago, a home office deduction was total audit-bait. When the deduction first came out, people would take their hobby room and call it a "home office" and deduct the cost from their taxes. Problem was, they were employed by a company that provided an office and thus the home office wasn't necessary for work.
Now in this modern world, where CoVid is forcing many people to work from home, and many companies and government agencies (including the Patent Office) have employees work from home several days a week, it is possible that maybe a home office is deductible. But again, consult a tax advisor, as policies change from year-to-year and what qualifies as a "home office" can vary. Like I said in a very early posting, you may have to fight your spouse on this - a home office is a home office, not a "home office and guest room!" or "home office and hobby room!" or whatever. It generally has to be a dedicated space.
If you are declaring income on a W-2 (as opposed to a 1099) and deducting a home office, it could be audit bait. But again, a tax advisor could tell you what is and isn't deductible. Relying on me, or "GoBankingRates!" is a really bad idea.
Mark makes pottery and sells some at the local art gallery. The expenses involved far exceed any income produced. A kiln by itself can cost a few thousand dollars - you have to sell a lot of pots to pay for that. Then there is the cost of the clay, the glazes, and the electricity to fire the kiln, not to mention the cost of building the studio.
The threshold for filing a 1099 is generally around $600 or so - but it can be less, for example, for interest payments over $10 or so (numbers vary, again, consult a tax advisor). So far, Mark's sales haven't generated any 1099's from the gallery and the expenses far outweigh the income. Should we report the few hundred dollars in sales (and then deduct a similar portion of the expenses to zero it out?). Technically, yes. But since no 1099 was issued, it is de minimus and akin to reporting income and expenses from a child's lemonade stand. There are somethings the IRS doesn't want to be bothered about.
On the other hand, if you are issued a 1099 and don't mention that on your return, that is pretty much a 100% audit bait situation, although I recall I failed to report a minor interest income 1099 one year and all the IRS did was "adjust" my refund accordingly. They don't have the time or inclination to audit someone over $25 in unreported interest income.
If the gallery does issue a 1099 form, well, I will have to report that income - and deduct corresponding expenses, to zero that income out. And for that reason, I keep track of all Mark's pottery expenses in Quickbooks by classifying them under "POTTERY" so I can easily generate an annual report showing his expenses far outweigh any incidental income. That is the deal with hobby businesses - any sales are usually just to partially offset the expenses involved and don't generate any profit for the hobbyist. As such, they are not taxable - nor are they deductible beyond the level of income. It just zeroes out. No profit, no loss, either.
Sure, it would be sweet if we could have deducted all of Mark's pottery expenses, including the construction cost of the studio or the annual "home office" deduction, cost of materials, trips to other pottery studios and art exhibitions, printed materials, accessories, tools - even uniforms. It would have knocked down our tax bill back in the day when we had a tax bill. But the law doesn't allow that, because it is a hobby not a business.
It is akin to one of the other slides in this stupid slideshow - which claims you can deduct gambling losses. As with Hobby expenses, the answer is a qualified "YES" in that you can deduct losses to the extent of your winnings. So if the Bellagio Casino issues you a W2-G when you win $10,000 at craps, you have to declare that income. But you can also deduct the $5,000 you lost at Blackjack. On the other hand, if you just lost money (as most people do) you can't declare that loss to offset your salary income. You cannot deduct your way to wealth!
Sadly, I think this slideshow from "GoBankingRates!" was prepared by someone from overseas who really doesn't understand the tax code in the USA. Yes, you should deduct a "hobby expense" if you have reported hobby income on a 1099. And yes, you should report income if you make a profit. But you can only deduct up to the amount of reported income - effectively zero-ing out your hobby income for that year. You cannot declare a loss on a hobby to offset income from your job - or your spouse's job, as my Dad tried to do, deducting Mother's losses to offset his salary. The cost of the audit, back taxes, interest and penalty made it not worthwhile.
If your taxes are beyond 1040-EZ it may pay to consult with a tax advisor. It could cost less than the cost of using online software to file, or at least it was in my case.
But advice online? Don't even take that from me!
