Tax Tips from your Blue Springs Tax Preparation Office for Hobbies that Earn Income

Millions of people enjoy hobbies such as stamp or coin collecting, craft making, and horse breeding, but the IRS may also consider them a source of income. As such, if you engage in a hobby that provides a source of income, you must report that income on your tax return; however, taxpayers (especially business owners) should be aware that the way income from hobbies is reported is different from how you report income from a business. For example, there are special rules and limits for deductions you can claim for a hobby.

Here are five basic tax tips from your Blue Springs tax preparation office you should know if you get income from your hobby:

Business versus Hobby. There are nine factors to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. To learn more about these nine factors, please call.

Allowable Hobby Deductions. You may be able to 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 helpful or appropriate. Don't hesitate to call if you need more information about these rules.

Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can't deduct that loss from your other income.

How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. Use Schedule A, Itemized Deductions to report these types of expenses.

Use a tax professional. Hobby rules can be complex, but using a Grain Valley tax professional makes filing your tax return easier. If you have any questions about reporting income from a hobby, please call.

Death is No Excuse

Blue Springs Income Tax Services

The federal government is an equal-opportunity tax assessor. Even the dead can’t escape taxes.

The final accounting required of the deceased is not limited to an estate tax filing, but a federal income tax return must also be filed for the year in which the taxpayer passes. Please consult a professional Blue Springs tax preparation office with tax expertise if you find yourself in this situation.¹

Filing for the Deceased

Of course, the deceased can’t file his or her own return, so that responsibility usually falls to the estate’s executor or administrator. Here are the highlights of how a tax return is filed in the name of a deceased individual.

• The form used is the same as the one that would have been used if the taxpayer were still alive, but "deceased" is written after the taxpayer's name.
• The filing deadline is April 15 of the year following the taxpayer's death.
• Some income that might appear to belong on the decedent's final return may in fact be taxable to the estate or to the beneficiary who receives it. Otherwise known as “income in respect of a decedent,” this is income that the decedent was entitled to receive at the time of death, but is not reported on the final income tax return.
• Deductible expenses paid before death can be utilized on the final return. The cost of a final illness can be deducted on the deceased’s return even if the bills were paid after the date of death.
• If the taxpayer was married, the widow or widower may file a joint return. The executor usually files a joint return, but the surviving spouse can file it if no executor or administrator has been appointed.
• When an executor or administrator is involved, he or she must sign the return for the decedent. For a joint return, the spouse must also sign.
• If a refund is due, you should also complete and file a copy of Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer.²

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.
2. IRS.gov, 2016

Red Flags for Tax Auditors

Grain Valley Tax Preparation

No one wants to see an Internal Revenue Service (IRS) auditor show up at his or her door. The IRS can’t audit every American’s tax return, so it relies on guidelines to select the ones most deserving of its attention.

Here are six flags that may make your tax return prime for an IRS audit.¹

The Chance of an Audit Rises with Income

According to the IRS, less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to nearly 4% for those with incomes between $500,000 and $1 million, and is over 8% for those making between $1 million and $5 million.²

Deviations from the Mean

The IRS has a scoring system it calls the Discriminant Information Function that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The IRS does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return is within the range of others with similar income.

When a Business is Really a Hobby

Taxpayers who repeatedly report business losses increase their audit risk. In order for the IRS not to consider your business as a hobby, it needs to have earned a profit in three of the last five years.

Non-Reporting of Income

The IRS receives income information from employers and financial institutions. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.

Discrepancies Between Exes

When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments may be deducted on one return, while alimony income goes unreported on the contra party’s return. Another common tripwire is when both former spouses claim the same dependents.

Claiming Rental Losses

Passive loss rules prevent deductions of losses on rental real estate, except in the event when an individual is actively participating in the property’s management (deduction is limited and phased out), or with real estate professionals who devote greater than 50% of their working hours to this activity. This is a deduction to which the IRS pays keen attention.

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
2. IRS, 2016

Considering Hiring a Tax Professional?

Grain Valley & Blue Springs Tax Preparation

Here are 3 reasons why you should start having a Grain Valley tax professional prepare your taxes:

1 - You can hire someone to do it better than you can! A professional knows the ins & outs of their industry like you know your own.

2 - You really hate doing taxes. Why spend time doing something that you generally despise? Use that time generating income for your business instead of pulling your hair out.

3 - It can save you money. Hiring the right person could help you spend less of your money in taxes.

There are many other reasons like you make more than 200k, own your own business, planning to make a large gift, selling real estate, manage rental properties, foreign source income, shareholder in a S-corp or file K-1s, and more.

NOW is the time to hire your tax person and to make sure your taxes are set up properly. January is too late. Set up your free consultation online or call 816-220-2001

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

Tips for Individuals Who Need to Reconstruct Records After a Disaster

Taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or insurance reimbursement.

Here are 12 things taxpayers can do to help reconstruct their records after a disaster from you Grain Valley tax preparation office:

• Taxpayers can get free tax return transcripts by using the Get Transcript tool on IRS.gov, or use their smartphone with the IRS2Gomobile phone app. They can also call 800-908-9946 to order them by phone.
• To establish the extent of the damage, taxpayers should take photographs or videos as soon after the disaster as possible.
• Taxpayers can contact the title company, escrow company, or bank that handled the purchase of their home to get copies of appropriate documents.
• Home owners should review their insurance policy as the policy usually lists the value of a building to establish a base figure for replacement.
• Taxpayers who made improvements to their home should contact the contractors who did the work to see if records are available. If possible, the home owner should get statements from the contractors to verify the work and cost. They can also get written accounts from friends and relatives who saw the house before and after any improvements.
• For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, the taxpayer can contact the attorney who handled the trust.
• When no other records are available, taxpayers can check the county assessor’s office for old records that might address the value of the property.
• There are several resources that can help someone determine the current fair-market value of most cars on the road. These resources are all available online and at most libraries:
• Kelley’s Blue Book
• National Automobile Dealers Association
• Edmunds
• Taxpayers can look on their mobile phone for pictures that show the damaged property before the disaster.
• Taxpayers can support the valuation of property with photographs, videos, canceled checks, receipts, or other evidence.
• If they bought items using a credit card or debit card, they should contact their credit card company or bank for past statements.
• If a taxpayer doesn’t have photographs or videos of their property, a simple method to help them remember what items they lost is to sketch pictures of each room that was impacted.

More Information:

• Publication 547, Casualties, Disasters, and Thefts
• Publication 584, Casualty, Disaster, and Theft Loss Workbook
• Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook
• Publication 2194, Disaster Resource Guide for Individuals and Businesses
• Federal Emergency Management Agency
• Small Business Administration
• Disasterassistance.gov

Have questions, please contact your Grain Valley tax preparation office today.

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

Taxpayers Should Be Wary of Unsolicited Calls from the IRS

Taxpayers who get an unexpected or unsolicited phone call from the IRS should be wary – it’s probably a scam. Phone calls continue to be one of the most common ways that thieves try to get taxpayers to provide personal information. These scammers then use that information to gain access to the victim’s bank or other account. 

For more information contact your Grain Valley or Blue Springs Income Tax Preparation office today at 816-220-2001

When a taxpayer answers the phone, it might be a recording or an actual person claiming to be from the IRS. Sometimes the scammer tells the taxpayer they owe money and must pay right away. They might also say the person has a refund waiting, and then they ask for bank account information over the phone.

Taxpayers should not take the bait and fall for this trick. Here are several tips that will help taxpayers avoid becoming a scam victim.
The real IRS will not:

• Call to demand immediate payment
• Call someone if they owe taxes without first sending a bill in the mail
• Demand tax payment and not allow the taxpayer to question or appeal the amount owed
• Require that someone pay their taxes a certain way, such as with a prepaid debit card
• Ask for credit or debit card numbers over the phone
• Threaten to bring in local police or other agencies to arrest a taxpayer who doesn’t pay
• Threaten a lawsuit

Taxpayers who don’t owe taxes or who have no reason to think they do should follow these steps:

• Use the Treasury Inspector General for Tax Administration’s IRS Impersonation Scam Reporting web page to report the incident.
• Report it to the Federal Trade Commission with the FTC Complaint Assistant on FTC.gov. 
• Taxpayers who think they might actually owe taxes should follow these steps:
• Ask for a call back number and an employee badge number.
• Call the IRS at 1-800-829-1040.

Every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are the Taxpayer Bill of Rights. Taxpayers can visit IRS.gov to explore their rights and the agency’s obligations to protect them.
IRS YouTube Videos:

• Tax Scams – English | Spanish | ASL

Share this tip on social media -- #IRSTaxTip: Taxpayers Should Be Wary of Unsolicited Calls from the IRS. https://go.usa.gov/xnqn4

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax