Inside This Issue
Five Basic Tax Tips about Hobbies
Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship.
You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are five tax tips you should know about hobbies:
1. Is it a Business or a Hobby? A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider nine factors when you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation. For more about ‘not-for-profit’ rules see Publication 535, Business Expenses.
2. Allowable Hobby Deductions. Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
3. Limits on Hobby Expenses. Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.
4. How to Deduct Hobby Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.
5. Use IRS Free File. Hobby rules can be complex and IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $58,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website.
Additional IRS Resources:
- Business or Hobby? Answer Has Implications for Deductions
- Publication 525, Taxable and Nontaxable Income
- Publication 529, Miscellaneous Deductions
- Publication 17, Your Federal Income Tax
- IRC Section 183: Activities Not Engaged in For Profit (Audit Technique Guide) – details on the factors to determine ‘for profit’ or ‘not-for-profit’
Issue Number: IRS Summertime Tax Tip 2014-20
Deducting Moving Expenses
If you move because of your job, you may be able to deduct the cost of the move on your tax return. You may be able to deduct your costs if you move to start a new job or to work at the same job in a new location. The IRS offers the following tips about moving expenses and your tax return.
In order to deduct moving expenses, your move must meet three requirements:
1. The move must closely relate to the start of work. Generally, you can consider moving expenses within one year of the date you start work at a new job location. Additional rules apply to this requirement.
2. Your move must meet the distance test. Your new main job location must be at least 50 miles farther from your old home than your previous job location. For example, if your old job was three miles from your old home, your new job must be at least 53 miles from your old home.
3. You must meet the time test. After the move, you must work full-time at your new job for at least 39 weeks the first year. If you’re self-employed, you must meet this test and work full-time for a total of at least 78 weeks during the first two years at the new job site. If your income tax return is due before you’ve met this test, you can still deduct moving expenses if you expect to meet it.
If you can claim this deduction, here are a few more tips from the IRS:
- Travel. You can deduct transportation and lodging expenses for yourself and household members while moving from your old home to your new home. You cannot deduct your travel meal costs.
- Household goods and utilities. You can deduct the cost of packing, crating and shipping your things. You may be able to include the cost of storing and insuring these items while in transit. You can deduct the cost of connecting or disconnecting utilities.
- Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the cost of selling a home or the cost of entering into or breaking a lease. See Publication 521 for a complete list.
- Reimbursed expenses. If your employer later pays you for the cost of a move that you deducted on your tax return, you may need to include the payment as income. You report any taxable amount on your tax return in the year you get the payment.
- Address Change. When you move, be sure to update your address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.
Premium Tax Credit – Changes in Circumstances. If you purchased health insurance coverage from the Health Insurance Marketplace, you may receive advance payment of the premium tax credit in 2014. It is important that you report changes in circumstances, such as when you move to a new address, to your Marketplace. Other changes that you should report include changes in your income, employment, family size, or eligibility for other coverage. Advance credit payments provide premium assistance to help you pay for the insurance you buy through the Marketplace. Reporting changes will help you get the proper type and amount of premium assistance so you can avoid getting too much or too little in advance.
Additional IRS Resources:
- Publication 5152: Report changes to the Marketplace as they happen English Spanish
- Can I Deduct My Moving Expenses? – Interactive Tax Assistant tool
- Tax Topic 455 – Moving Expenses
- Form 3903, Moving Expenses
Issue Number: IRS Tax Tip 2014-29
Itemizing vs. Standard Deduction: Six Tips to Help You Choose
When you file your tax return, you usually have a choice whether to itemize deductions or take the standard deduction. Before you choose, it’s a good idea to figure your deductions using both methods. Then choose the one that allows you to pay the lower amount of tax. The one that results in the higher deduction amount often gives you the most benefit.
The IRS offers these six tips to help you choose.
1. Figure your itemized deductions. Add up deductible expenses you paid during the year. These may include expenses such as:
- Home mortgage interest
- State and local income taxes or sales taxes (but not both)
- Real estate and personal property taxes
- Gifts to charities
- Casualty or theft losses
- Unreimbursed medical expenses
- Unreimbursed employee business expenses
Special rules and limits apply. Visit IRS.gov and refer to Publication 17, Your Federal Income Tax for more details.
2. Know your standard deduction. If you don’t itemize, your basic standard deduction for 2013 depends on your filing status:
- Single $6,100
- Married Filing Jointly $12,200
- Head of Household $8,950
- Married Filing Separately $6,100
- Qualifying Widow(er) $12,200
Your standard deduction is higher if you’re 65 or older or blind. If someone can claim you as a dependent, that can limit the amount of your deduction.
3. Check the exceptions. Some people don’t qualify for the standard deduction and therefore should itemize. This includes married couples who file separate returns and one spouse itemizes.
4. Use the IRS’s ITA tool. Visit IRS.gov and use the Interactive Tax Assistant tool to help determine your standard deduction.
6. File Electronically. You may be eligible for free, brand-name software to prepare and e-file your tax return. IRS Free File will do the work for you. Free File software will help you determine if you should itemize and file the right tax forms. It will do the math and e-file your return – all for free. Otherwise, you may file electronically with commercial software, or through a paid preparer.
Additional IRS Resources:
Issue Number: IRS Tax Tip 2014-07
Top Ten Tips to Help You Choose a Tax Preparer
Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.
Here are ten tips to keep in mind when choosing a tax preparer:
1. Check the preparer’s qualifications. All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes.
2. Check the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.
3. Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.
4. Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.
5. Make sure the preparer is available. Make sure you’ll be able to contact the tax preparer after you file your return - even after the April 15 due date. This may be helpful in the event questions come up about your tax return.
6. Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.
7. Never sign a blank return. Don’t use a tax preparer that asks you to sign a blank tax form.
8. Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.
9. Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.
10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:
- Tax Topic 254 - How to Choose a Tax Return Preparer
- Choosing a Tax Professional
- Verify the Status of an Enrolled Agent
- How to Make a Complaint About a Tax Return Preparer
- How to Report Suspected Tax Fraud Activity
Issue Number: IR-2014-10
EITC Awareness Day: IRS Kicks-Off Tax Season Alerting Low- and Moderate-Income Workers of Significant Tax Benefit
WASHINGTON — As the Internal Revenue Service starts processing returns today, it joins partners nationwide in launching the Earned Income Tax Credit Awareness Day outreach campaign to ensure that millions of low-and moderate-income workers get the credit they deserve and get it right.
Local officials and community organizations across the country are holding news conferences and outreach events highlighting the benefits of this key work incentive for individuals and families who earned $51,567 or less last year. An estimated four out of five eligible workers and families get the credit, but millions miss it annually either because they don’t claim it when filing or don’t file a tax return at all.
“One-third of the population eligible for EITC changes each year as their personal circumstances change,” said IRS Commissioner John Koskinen. “We want workers who may qualify for EITC for the first time to have all the information they need to get the EITC and get it right.”
The EITC varies depending on income, family size and filing status. The IRS has upgraded the interactive EITC Assistant, at www.irs.gov/eitc, to better help taxpayers and tax preparers. People can answer a few questions about income, family size and filing status, among other things. The EITC Assistant will help determine eligibility and will figure an estimated EITC refund. You can even get a printout explaining why you do or do not qualify. Last year, over 27 million eligible workers and families received more than $63 billion total in EITC, with an average EITC amount of $2,300.
Workers, self-employed people and farmers who earned $51,567 or less last year could receive larger refunds if they qualify for the EITC. That could mean up to $487 in EITC for people without children, and a maximum credit of up to $6,044 for those with three or more qualifying children. Unlike most deductions and credits, the EITC is refundable. In other words, those eligible may get a refund from the IRS even if they owe no tax.
Get the Credit: How to Claim the EITC
To get the EITC, workers must file a tax return, even if they are not required to file, and specifically claim the credit. Free tax help is available. Those eligible for the EITC have free options:
- Free File on IRS.gov Free brand-name tax software walks people through a question and answer format to help them prepare their returns and claim every credit and deduction for which they are eligible.
- Free File using Free File Fillable Forms. This option, designed for taxpayers comfortable preparing their own returns, allows people to file electronically for free using online versions of IRS paper forms.
- Free tax preparation sites EITC-eligible workers can seek free tax preparation at thousands of Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites. To locate the nearest site, taxpayers can search www.IRS.gov or call the IRS at 800-906-9887.
The IRS reminds taxpayers that even though most refunds are issued in less than 21 days, many factors can affect how long it takes to issue a particular refund. Some returns require additional review, causing it to take longer to process any related refunds. Taxpayers can track the status of their refund with the “Where’s My Refund?” tool available on IRS.gov.
Get It Right: Avoid Errors
Taxpayers are responsible for the accuracy of their tax return regardless of who prepares it. The rules for EITC are complicated. The IRS urges taxpayers to seek help if they are unsure of their eligibility.
Some common EITC errors are:
- Claiming a child who does not meet the relationship, age or residency tests
- Filing as "single" or "head of household" when married
- Over or under reporting of income and or expenses to qualify for or maximize EITC
- Missing Social Security numbers or Social Security Number and last name mismatches for both taxpayers and the children
More than half of EITC claims are prepared by tax professionals and people should choose trustworthy assistance. To help ensure that only those eligible get the credit and that everyone who is eligible gets the right amount, the IRS requires paid preparers to file Form 8867, Paid Preparer's Earned Income Credit Checklist, with any federal tax return claiming the EITC.
The IRS continues to look for ways to reduce these errors. Taxpayers should reply promptly to any letter from the IRS requesting additional information about EITC. If taxpayers need assistance or have questions, they should call the number included in the IRS letter.
Beware of Scams
EITC provides a financial boost for millions of hard-working Americans. However, a deliberate error can have lasting impact on future eligibility to claim EITC. Beware of scams that claim to increase the EITC refund. Scams that create fictitious qualifying children or inflate income levels to get the maximum EITC could leave taxpayers with a penalty. If an EITC claim was reduced or denied after tax year 1996 for any reason other than a mathematical or clerical error, taxpayers must file Form 8862, Information To Claim Earned Income Credit After Disallowance, with their next return to claim the credit.
Issue Number: IR-2014-5
Watch Out for Tax Scams as Filing Season Opening Nears
IRS YouTube Videos:
Tax Scams: English Spanish ASL
ID Theft: Are You a Victim of Identity Theft? English Spanish ASL
ID Theft: Protect Yourself From Identity Theft English Spanish ASL
ID Theft: IRS Efforts on Identity Theft English Spanish
WASHINGTON — With the start of the 2014 tax season approaching on Jan. 31, the Internal Revenue Service urged taxpayers to be aware that tax-related scams using the IRS name proliferate during this time of year.
Tax scams can take many forms, with perpetrators posing as the IRS in everything from
e-mail refund schemes to phone impersonators. The IRS warned taxpayers to be vigilant of any unexpected communication that is purportedly from the IRS at the start of tax season.
The IRS encourages taxpayers to be on the lookout for phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for personal identification numbers (PINs), passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to firstname.lastname@example.org.
In addition, the IRS continues to aggressively expand its efforts to protect and prevent refund fraud involving identity theft as well as work with federal, state and local officials to pursue the perpetrators of this fraud.
The IRS offers several suggestions for taxpayers to help protect themselves against scams and identity theft:
- Don’t carry your Social Security card or any documents that include your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).
- Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
- Protect your financial information.
- Check your credit report every 12 months.
- Secure personal information in your home.
- Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
- Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
Taxpayers also should be very careful when choosing a tax preparer. While most preparers provide excellent service to their clients, a few unscrupulous return preparers file false and fraudulent tax returns and ultimately defraud their clients. It is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return.Refer to our Tips to Help you Choose a Tax Preparer for the upcoming 2014 Tax Season starting Jan. 31.
Issue Number: IRS Tax Tip 2014-03
Which Tax Form Should You File?
Which form should you use to file your federal income taxes? These days, most people use a computer to prepare and e-file their tax forms. It’s easy, because tax software selects the right form for you. If you file on paper, you’ll need to pick the right form to use.
Before you decide, check out IRS Free File on IRS.gov. It has free tax software or a Fillable Forms option that allows you to fill in your tax forms using a computer. You can e-file the completed forms for free!
If you still prefer paper and pen, here are some tips on how to choose the best form for your situation.
You can generally use the 1040EZ if:
- Your taxable income is below $100,000;
- Your filing status is single or married filing jointly;
- You are not claiming any dependents; and
- Your interest income is $1,500 or less.
The 1040A may be best for you if:
- Your taxable income is below $100,000;
- You have capital gain distributions;
- You claim certain tax credits; and
- You claim adjustments to income for IRA contributions and student loan interest.
However, reasons you must use the 1040 include:
- Your taxable income is $100,000 or more;
- You claim itemized deductions;
- You are reporting self-employment income; or
- You are reporting income from sale of a property.
Read more about which form to use in IRS Publication 17, Your Federal Income Tax. The quickest way to get tax forms and instructions is to visit IRS.gov and click on the ‘Forms & Pubs’ tab. New tax forms often appear online well before the printed forms are available.
You can also have forms mailed to you by calling the IRS at 800-TAX-FORM (800-829-3676), or you can pick them up at a local IRS office. Some libraries and post offices also have tax forms.