Some parts of tax reporting are easy. Everyone knows you have to report your income from your job, large financial gifts, financial windfalls like lottery wins, capital gains, and so on. But what about income you generate while fulfilling your hobby interests, money you get paid for an occasional service your provide, such as pet sitting, but that is not a business, or income received through a bartering service? Do you even have to give the IRS a heads up about this money, or can you pocket it, free and clear?

The answer is: you do have to report income received through avenues such as these mentioned above. If you fix cars for a hobby, but get paid $500 to repair a neighbor’s car, it goes on your tax return. If you make an extra $75 a month by walking a neighbor’s dog while they work the late shift, it goes on your tax return. If you worked painting a house and your customers paid you by giving you a used car in lieu of cash, the value of that car must go on your tax return. If you make less than $20 a month in tips, and the tips are not included on your W2 form, then they must be included on your tax return.

You get the picture here. Every bit of income you receive has to be reported to the IRS. These alternate sources of income should be reported on the “miscellaneous income” section of your 1040. Whether or not you will actually end up paying taxes on that income is another matter. That depends on your tax bracket and the deductions you can claim. However, if you make a significant amount of money, tax free, through alternative sources throughout the course of the year; chances are you are going to be hit by a large tax bill. If you know you are going to have a substantial alternate income, then it pays to plan for your taxes all year long by setting things up so you can take the most deductions possible.

One great way to do this is to turn your hobby into a business. If you make money while enjoying your hobby, chances are it is really business already, in everything but name. All it takes to make it official is a trip to the county courthouse to fill out a “DBA” – Doing Business As – form. When you hobby becomes a business, all of your hobby related expenses become tax deductible. You can even begin to write off things that may not have occurred to you, like “office space expenses” for the use of your own home as the business base, your car and gas, your internet connection, and your phone and electricity. Turning your hobby or alternate income source into a business can save you money on your entire tax bill by opening up a whole new world of deduction possibilities.

Of course, when you are moving into areas of secondary incomes, self-employment, and extensive deductions, it makes sense to make a visit to a financial advisor who can guide you through the process. A financial advisor can make sure you are claiming every deduction available to you, and also make sure you that you are not claiming any deductions that are not available to you. People with self-employment income and plenty of deductions have a higher chance of being audited, so having a financial advisor on board can help you make sure your tax returns are above reproach.

Related posts:

1. Income Shifting – Can you Benefit from this Tax Break?
2. Little Surprises the Alternative Minimum Tax (AMT) Can Pull on You
3. Don’t Suffer the Alternative – The Alternative Minimum Tax, That Is
4. Six Savvy Deductions for Senior Retirees
5. Seven Major Tax Breaks You Can Take to Decrease Uncle Sam’s Share

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