How to Report Hobby Income and Expenses on Your Tax Return

Hobbies keep balance in our life. It is an activity that we love and enjoy that help us relieve the stress of our day-to-day lives or a diversion to keep us sane.

Although most hobbies are done just for leisure such as listening to music, playing sports, playing video games, reading books, traveling, or what have you, there are hobbies that can generate a little income on the side such as blogging, collecting and trading baseball cards or stamps, painting, craft-making , etc. In some cases, people have turned their hobbies into a very profitable business.

Going back with the hobby issue, income may not be consistent every month but it is still extra money. In most cases, there are expenses involved and these could be more than the income you’ll receive.

So, the question is what are the tax implications of your hobbies?

Reporting Hobby Income

Unless the IRS says it is exempted, all income are taxable and this includes income you receive from your hobby. One key advantage of hobby income is that since you are not running a business, hobby income is not subject to self-employment tax. You are only subject to your regular tax rates.

However, just like with reporting gambling losses and winnings, you cannot offset the expenses from your hobby income and report only the net earnings. You have to report hobby income and expenses separately on your tax return.

Where to report hobby income

Hobby income must be reported in line 21 of Form 1040. You also need to write the description on that line and in this case you need to write “hobby income.”

Reporting Hobby Expenses

Restrictions or Limitations

There are many restrictions or limitations when deducting your hobby expenses:

  • Separate Reporting With Income– As stated previously, you cannot offset the expenses against the income and report only the net earnings. Hobby expenses must be reported separately from hobby income.
  • Deductible Only if itemizing – Hobby expenses are only deductible if you are itemizing your return. This means that if you are just claiming the standard deduction, then you cannot deduct any of your expenses at all.
  • Limited to the amount of income – You can only deduct up to the amount of the income. So, if the expenses exceed the income, you cannot claim the excess expenses on your tax return. As an example, if your hobby generated $500 in revenue and your expenses is $850, the amount of the expenses that you can report is only $500, the $350 will be forfeited
  • Subject to the 2% of AGI (Adjusted Gross Income) limitations – Another catch is after factoring in the maximum limit on expenses based on income, the allowable expense  is also subject to the 2% of AGI limitations and is included as part of the Miscellaneous Expenses. The 2% AGI is called the “floor” amount and you can only deduct the amount that are in excess of this floor amount. As an example,  if your AGI is $50,000 then your “floor” amount for the miscellaneous expenses is $1,000 (2% x $50,000). If the aggregate total of all your miscellaneous expenses is $1,300, then you can only deduct $300 ($1,300 less $1,000 floor) on your tax return.

What exactly can you deduct?

Just like the rules used for the business, the expenses that you can deduct must be ordinary, necessary and directly related to  your hobby. As an example, if you love painting, then any expenses that you used for your painting that are ordinary and necessary can be included as hobby expenses such as the paint brush, paint, binders for your portfolio, and even travel expenses if you go to paint exhibit shows.

Where to report expenses?

Expenses must be reported in Schedule A line 23 and write hobby expenses on the appropriate description.

Source: IRS Publication 17 and 535.

Comments

  1. That is a good tip. I considered my blog as hobby income last year, but this year it is a business.

    • Ken says:

      Thanks. I think for most of us who are just getting started and not making much, we all have to consider our blogs as a hobby first. Until, it starts to generate decent income, I think it’s time to think and organize everything for transitioning into a business.

  2. great post. I guess as soon as you start making money with a hobby (lucky you!) that it stops being a hobby and starts being a business.

    • Ken says:

      I think it’s not automatic. I believe there are a lot of things that you have to do for an activity to be classified as a business as otherwise the IRS can still audit you and classify you as a hobby even if you are operating as a business.

  3. Very timely post for me – I’ve been thinking about the tax implications of my blog and what I will need to do at the end of the year. Time to do some more research!

  4. Ken says:

    Good to know the post helps in some way.

  5. Jackie says:

    Good information. I think a lot of people don’t even realize that they’re supposed to be reporting hobby income on their tax returns, even if it’s just a little bit of money. I’ve been keeping track of my hobby expenses in the hope that maybe I’ll sell a painting and be able to offset them somewhat, but I didn’t realize there was an AGI limit so maybe I should just concentrate on painting and not worry about it instead 🙂

    • Ken says:

      Thanks, there are so many limitations on the hobby expenses and sometimes this results in not being able to deduct any of those hobby expenses.

  6. I’m sure a number of hobbyist bloggers are going to find this post extremely useful! 🙂

  7. Good rule of thumb: the IRS distinguishes between activities presumed for profit versus a hobby by whether you have made a profit in at least three of the last five years, including the current year. If you meet this threshold, you should consider your activity for profit. Being considered a for profit activity can open the door to additional tax return deductions you can’t include with hobby expenses.

  8. Tammy says:

    How do you start a blog that will generate income? I understand how you make money once the blog is started but I am assuming you would have to start a blog that is isn’t a free one.