Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid asalary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenn's taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized deductions.

Question

Quizplus · Accepted Answer

The $2,000 of racing winnings is taxable income and must be included in Glenn's gross income. However, Glenn can deduct his hobby expenses up to the amount of his hobby income (in this case, $2,000). Therefore, Glenn can deduct $2,000 of his $4,200 in hobby expenses, resulting in a net increase in taxable income of $2,200 ($2,000 racing winnings - $800 hobby expenses not deductible). However, because Glenn itemizes his deductions, he can also deduct the remaining $2,400 of hobby expenses as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. This results in a further increase in taxable income of $240 ($2,400 x 10%), for a total increase in taxable income of $1,640 ($2,200 + $240).

Glenn Is an Accountant Who Races Stock Cars as a Hobby