Can You Deduct Your Hobby Expenses?

While you can deduct certain hobby expenses, the deduction is subject to lots of limitations.

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Hobbies are fun. They can also cost money and, sometimes, make money. Can you deduct your hobby expenses from your taxes? As with many tax questions, the answer is "it depends."

What Is a Hobby?

A hobby is something you do for for fun or pleasure, like writing short stories, painting, knitting, or woodworking. It's not a business because you don't do it primarily to earn a profit. You may earn money from a hobby, but this is not your main goal for the activity. If that is your main goal then it's a business and not a hobby. It's usually easy to tell if an activity is a hobby or a business.

Deducting Your Hobby Expenses

Because hobbies are not businesses, hobbyists cannot take the tax deductions which business owners are entitled to take for their business-related activities. Instead, hobbyists can deduct their hobby-related expenses only from the income the hobby generates. If you have no income from the hobby, you get no deductions. And you can’t carry over the deductions to use in future years when you earn income—you lose them forever.

Example: Charles collects antiques as a hobby. This year, he spent $10,000 buying antiques and earned no income from the activity. His $10,000 in expenses can be deducted only from income he earned from his hobby. Because he earned no money from antique collecting during the year, he can’t deduct any of these expenses this year—and he can’t carry over the deduction to any future years.

Even if you have income from your hobby, you must deduct your expenses in a way that is less advantageous (and more complicated) than regular business deductions. Hobby expenses are deductible only as a "Miscellaneous Itemized Deduction" on IRS Schedule A (the form that you file with your Form 1040 to claim itemized deductions). This means that you can deduct your hobby expenses only if you itemize your deductions instead of taking the standard deduction. You can itemize deductions only if your total deductions are greater than the standard deduction—in 2012, the standard deduction was $5,950 for single people and $11,900 for married people filing jointly. If you do itemize, your hobby expenses can be used to offset your hobby income—but only to the extent that your expenses plus your other miscellaneous itemized deductions exceed 2% of your adjusted gross income (your total income minus business expenses and a few other expenses).

Example: Assume that Charles, a single taxpayer, earned $5,000 from his antique collecting hobby this year and had $10,000 in expenses. He could deduct $5,000 of these expenses as an itemized deduction—the amount equal to his antique collecting income. However, Charles can only deduct those expenses that, together with his other miscellaneous itemized deductions, exceed 2% of Charles’s adjusted gross income (AGI) for the year. If Charles’s AGI was $100,000 and he had no other miscellaneous itemized deductions, he could not deduct the first $2,000 in expenses (2% × $100,000 = $2,000). So Charles can deduct only $3,000 of his antique collecting expenses on his Schedule A.

Clearly, you should not engage in a hobby to receive tax benefits--there aren't any. December 2012

by: , J.D.

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