According to the Internal Revenue Service (IRS), many taxpayers incorrectly classify a hobby as a business. These taxpayers then deduct expenses associated with the incorrectly classified activity resulting in approximately $30 billion per year in unpaid taxes. Intending to make a profit versus conducting the activity strictly for pleasure is what differentiates these activities according to IRS regulations.

The following questions should be addressed to determine if your activity should be classified a business or a hobby:

• Do you put time and effort into the activity with the intent to make a profit or do you conduct the activity only for pleasure?
• Do you depend on the income from the activity?
• Do you have or do you intend to gain the expertise needed to conduct the activity in a manner to show a profit?
• Have you made a profit in the past with similar activities?
• Has your activity made a profit in some years and do you expect to make a profit in the future?
• If there are losses, are they due to circumstances beyond your control or during the start- up years with your business and are you willing to change your method of operation in order to show a profit?

If you are able to answer these questions positively, then generally in the eyes of the IRS your activity is a business and you may deduct the associated expenses from the activity’s income within IRS regulations. Consequently, any losses from your business activity may be used to offset other income, again within IRS regulations.

In addition to the intent to make a profit, typically the IRS views any activity that makes a profit during three of the last five years to be a business. If activities which consist primarily of breeding, showing, training or racing horses show a profit for two years of the last seven, the IRS considers the activity to be a business.

Carefully examine the intent for your activity to determine its classification before deducting any losses against other income as the IRS is reviewing small business losses more carefully.

Newlyweds commonly deal with considerable stress getting to their wedding day consequently many do not want to add any additional tension by discussing the sensitive topic of money and household finances. Yet marriage involves merging lives, money, and goals therefore this sensitive topic should be addressed prior to exchanging wedding vows.  But many engaged couples fail to discuss their individual financial views prior to marriage and in many cases it can be a rude awakening if they discover their new spouse has opposing views on money and financial matters. Unfortunately, most experts agree money issues are the leading cause of divorce and sadly divorce statistics verify this opinion.

Before taking the serious step into marriage, couples should discuss money, each one’s view of money, and future goals dependent on money. There are several issues which should be addressed prior to marriage and each partner needs be open and honest when discussing these. Typically, these should cover his or her current debts, credit score, future money plans, goals, and overall views of money. An honest discussion will reveal any potential red flags such as not paying bills in a timely manner, making large purchases on payday rather than setting some money aside for emergencies or the future and if money is just viewed as a means to pay bills and enjoy life rather than reaching goals.

After honestly and calmly discussing these money matters, a mutual plan and household budget should be prepared. This plan should include how their money will be pooled, how the bills will be paid, and future goals such as saving for emergencies, purchasing a home, vacations and retirement. If each partner is actively involved in preparing the budget, making spending decisions, and planning for the future, money issues after marriage should be lessened allowing the couple to have a good money foundation on which to build. Establishing a good money foundation will be one of the first steps toward achieving a successful marriage.

 

Donations to qualified charities are tax deductible expenses which can reduce your taxable income and therefore reduce the amount of taxes you pay. Unfortunately, not everyone is able to deduct their donations and not all donations are able to be deducted. If you file a Schedule A (Itemized Deductions) “long form” you will be able to include your contributions to qualified charities. Once you conclude it is to your advantage to file a Schedule A, the next step is to determine if your contributions qualify according to the Internal Revenue Service (IRS). The following criteria must be met before your contributions are considered deductible:

• You must have actually donated cash or property to the charity and not just pledged to do so in the future.
• Your contributions must have been to qualified tax-exempt organizations which include charities with a 501(c) (3) tax-exempt status, churches and other religious organizations.
• Your donations must meet the IRS record keeping regulations. The requirements for a cash donation consist of saving the receipt which can be a canceled check and/or a letter from the charity acknowledging the donation.
• You must be able to substantiate the fair market value of any non-cash donation as well as keep the written acknowledgement from the charity. Any non-cash donation over $500 requires you to complete IRS Form 8283 to include with your income tax return. Additionally, any donated property over $5,000 requires an appraisal for the property in addition to the receipt from the charity.

Please don’t let these regulations stop you from donating to your favorite charity as the regulations are not difficult to satisfy. The IRS’s criteria are easily met as long as you keep the receipts for your contributions, any acknowledgement letters from the charities, and remember to get any non-cash donation over $5,000 appraised.

Did you receive a large tax refund last year? If so, you allowed your money to be used as a loan to the government and gained nothing for this loan. To correct this situation you may want to adjust your withholding allowances so you receive the money in your pocket throughout the year rather than allowing the government through the IRS to use your money without paying you any interest!

The first step to adjusting your withholding is determining exactly how many allowances you have claimed on your W-4 form (the tax form your employer uses to determine how much income tax to withhold from your paycheck) then increase the number. For example, if you claimed three allowances and wish to decrease the amount you have withheld increase your allowances to four; the individual who prepares your paycheck should be able to tell what impact this change has on your paycheck.

If you rely on your refund to pay a particular bill such as property taxes, have the extra money you will receive in your paycheck automatically deposited into an account where you will gain some interest. Adjusting your withholding in this manner will still give you your refund but in smaller increments through your paycheck rather than your large refund at tax time. Also, if you handle your money in this manner you will avoid stressing at tax time wondering if your refund will arrive in time to pay that bill. Additionally by having the extra money you received in your paychecks immediately deposited into an interest bearing account, you will have gained something on your money – all it takes is you being disciplined and not spending the money before you pay that bill!

Now that school is out if you are a working parent you may have to pay for the care of your child during the time you are working. These expenses may qualify for the child and dependent care credit which can reduce your federal income taxes. This credit is available not only during the summer but throughout the year. The pertinent facts concerning this credit are:

• You and if applicable your spouse must have earned income. Earned income includes wages and self-employment. An exception would be a parent who is a full-time student or who is mentally or physically incapable of self-care.
• You must pay for the child or dependent care so you are able to work or look for work.
• The care must be for one or more qualifying persons such as a child under the age of 13 who you claim as a dependent or a spouse or dependent who is mentally or physically incapable of self-care and lived with you more than half the year.
• The care may be provided at a daycare facility outside your home, at a day camp or at your home.
• The credit may be up to 35 percent of your qualified expenses depending on your income.
• You may use up to $3,000 of the unreimbursed qualified expenses you paid for one qualifying person or up to $6,000 for two or more qualifying person.
• Expenses which do not qualify include: overnight camps, summer school tutoring, care provided by your spouse or an individual you can claim as a dependent. Special rules apply if you receive dependent care benefits from your employer.
• When claiming this credit, you must have the full legal name, address and Social Security number or employer identification number of the care provider as well as receipts or records of the payments.

This credit helps to offset the cost involved in caring for your child while you work but you must maintain accurate records. A file or folder is useful to keep the record in one location until needed for your income tax return. This organization might take a few minutes  on a weekly basis but should certainly save you time and avoid frustration at tax time!