Mrs. Hess bakes wedding cakes as a hobby and has developed quite a local reputat

Question

Mrs. Hess bakes wedding cakes as a hobby and has developed quite a local reputation for excellence. This year, she sold 29 cakes to family and friends for $200 each and spent a total of $1,700 on ingredients and decorations.

How much taxable income does Mrs. Hess’s hobby generate if her AGI before consideration of the hobby revenues and expenses is $33,000 and she doesn’t itemize deductions?

How would your answer change if Mrs. Hess pays enough state and local tax and makes enough charitable contributions to itemize deductions?

Explanation / Answer

Part 1)

In the given case, hobby related expenses of $1,700 cannot be claimed as deduction or will be treated as non-deductible as Mrs. Hess doesn't itemize deductions. In such a case, the entire amount of hobby related revenue of $5,800 (29*20) will be included in AGI and miscellaneous income.

Answer for Part 1 is $5,800

______

Part 2)

The amount of taxable income is arrived below:

____

Notes:

As Mrs. Hess's hobby related expenses are less than her hobby related revenues, she will be entitled to a claim miscellaneous itemized deduction only to the extent that her expenses exceed 3% of her AGI if Mrs. Hess pays enough state and local tax and makes enough charitable contributions to itemize deductions.

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