Final answer:
The tax treatment for hobby income requires that it be reported as part of your gross income, but deductions for hobby-related expenses are limited to the hobby income amount. Such expenses are only deductible if one itemizes, and the Tax Cuts and Jobs Act imposes further restrictions. This makes it essential to recognize the impact on overall tax obligations.
Step-by-step explanation:
Understanding the tax treatment for hobby revenues and expenses can affect your income taxes. Revenues generated from a hobby must be reported as income on your tax form. However, unlike a business, where you can deduct expenses that exceed income, hobby expenses can only be deducted up to the amount of hobby income. This limitation is critical as it prevents hobbyists from using losses to offset other income, which can be advantageous for tax purposes. The Internal Revenue Service (IRS) distinguishes between a hobby and a business, and this distinction is essential in determining how you report income and expenses.
When reporting hobby income, you add it to your other income on your tax form's appropriate line, which contributes to your adjusted gross income. For expenses, one can only take a deduction if they itemize deductions, and even then, only expenses up to the amount of hobby income are deductible. Additionally, hobby expenses are considered miscellaneous itemized deductions and subject to a threshold under the Tax Cuts and Jobs Act. This essentially limits or sometimes completely eliminates the ability to deduct hobby expenses.
It is therefore important to understand that while hobby income increases your tax liability, the ability to offset this additional income with hobby expenses is severely limited. Knowing this can prepare you for the potential tax impact of engaging in a hobby and help in better financial planning, considering tax obligations.