News & Resources

Hobby or Business? Why it Matters

Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Definition of a Hobby vs. a Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications. Read more

Tips for Recently Married or Divorced Taxpayers

Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration (SSA). A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.

• For recently married taxpayers, the tax scenario begins when the bride says “I do.” If she takes her husband’s last name, but doesn’t tell the SSA about the name change, complications may arise. For example, if the couple files a joint tax return with the bride’s new name, the IRS computers will not be able to match the new name with the Social Security number.
• After a divorce, a woman who had taken her husband’s name and made that change known to the SSA should contact the SSA if she goes back to her previous name.

If you have any questions related to your requirements to the IRS after getting married or divorced, or need help changing your name with the SSA, give us a call. We’re here to help.

Five Ways to Improve Your Financial Situation

If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble, then here are some steps to take to avoid financial ruin in the future.

If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action–before the bill collectors start calling.

1. Review each debt. Make sure that the debt creditors claim you owe is really what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.

2. Contact your creditors. Let your creditors know you are having difficulty making your payments. Tell them why you are having trouble-perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.

Tip: Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession. Read more

Tips Versus Service Charges: How to Report

IRS news release FS-2015-8, February 2015:

The Internal Revenue Service reminds employers that automatic gratuities are service charges, not tips. Employers should make sure they know the difference and how they report each to the IRS. What are tips?

Tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers.

Tips include:

• Cash tips received directly from customers.

• Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.

• The value of any noncash tips, such as tickets, or other items of value.

• Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangement.

Certain factors are used to determine whether payments constitute tips or service charges. The absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge:

• The payment must be made free from compulsion;

• The customer must have the unrestricted right to determine the amount;

• The payment should not be the subject of negotiations or dictated by employer policy; and

• Generally, the customer has the right to determine who receives the payment.

What are service charges?

An employer or employee’s characterization of a payment as a “tip” is not determinative. Again, the absence of any of the four factors listed earlier creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge. Read more

Your Taxes and the Affordable Care Act

Starting with this year’s filing season, taxpayers must report certain information related to health care coverage on their 2014 tax return when they file this April. In addition, taxpayers must provide proof of health insurance coverage or that they have received an exemption.

With that in mind, let’s take a look at how the Affordable Care Act might affect your tax situation, and based on your type of coverage, which new tax forms you might be receiving.

Tip: For additional information about IRS tax forms related to health care insurance, please see the article, Health Care Law: Changes to IRS Tax Forms, below.

Overview

The biggest change for most taxpayers is found on Line 61 of Form 1040, where individuals must either check a box to show they had health insurance or pay a penalty. In general, the penalty applies to individuals who did not have health insurance for more than three months in 2014.

In 2014, the penalty is the greater of one percent of modified adjusted gross income or $95 per adult ($47.50 per child under age 18, up to a maximum of $285 per family). While the IRS cannot issue a lien against you in order to make you pay the penalty, they are allowed to withhold the money from your refund.

Certain persons may qualify for an exemption from the penalty such as those who do not need to file a tax return ($10,150 for individuals, $13,050 for heads of household, and $20,300 for a married couples filing jointly). Other exceptions (there are eight in total) include being a member of a federally recognized tribe or qualifying for a hardship exemption if you filed for bankruptcy in the last 6 months or had medical expenses you couldn’t pay in the last 24 months that resulted in substantial debt.

Caution: Taxpayers who believe they qualify for an exemption must apply and receive an exemption certificate from the Marketplace.

Read more