I filed taxes last year and tax day is almost here again. It’s like the government wants me to pay taxes every year or something.
I was reading a book about the history of the Santa Fe Trail. It said that the Spanish treasury was so broke that people were required to pay taxes on their taxes.
I told my daughter about the unique phrase “taxes on taxes.”
Her response, “A co-worker used that phrase the other day.”
Obviously, her co-worker read the same book about the history of the Santa Fe Trail. Because, I can’t be that out of touch.
I recently learned that there is such a thing as a hobby income tax.
How did that happen?
I tried to research the origin, but it wasn’t readily available on Google.
So, I made up my own story.
Someone, like my daughter and her friends, made jewelry to sell at a craft fair.
At the end of the day, they took home $500 and gave themselves a big high five, or fist bump, or whatever.
The government said, “Where is my tax on this $500? You must report it.”
And, the government created forms to report the income.
Someone like my daughter received the form in the mail to report and pay taxes on this money.
“But it cost me $2,000 to make the jewelry that I sold for $500. I shouldn’t have to pay taxes on that.”
“I must be a business. I’ll file a Schedule C and put in all of my expenses.”
After following the instructions, the person showed a loss of $1,500, which actually lowered their tax burden. Cha Ching!
And the government said, “No. No. No. You can’t lower your tax burden by selling jewelry at a craft fair.”
So they created the hobby tax rules.
“Okay, you can deduct $500 from your income to offset the $500 you made (but only if you itemize deductions). You can’t lower your tax burden.”
All of this paperwork and drama for the same tax result as if the government had stayed out of the way in the first place.
As a contracted author, I must answer the question, “Is it a hobby or a business?”
My husband says hobby. I say business. The government has a handy lists of questions to make the determination, although it is subject to interpretation – like everything else in the tax code.
Will any of this stop crafters from making jewelry or writers from writing?
No.
As for me, I hope to avoid an audit. But if get audited, I can always use the experience in a story. Would the audit then become a business expense? Or a hobby expense?
A coffee mug is a business expense. Right?