Question

Penny, a full-time biochemist, loves stock car racing. To feed her passion, she bought a used dirt-track car and has started entering some local dirt-track races. The prize money is pretty small ($1,000 for the winner), but she really is not in it for the money. Penny reported the following income and expenses from her nights at the track:

Prize Money:                                                 3.920
Expenses:
    Transportation from her home to the races:   2,010
    Depreciation on the dirt-track car:                5,400
    Entry fees:                                                6,300
    Oil, gas, supplies, repairs for car:                2,960

What are the tax effects of Penny’s racing income and expenses assuming that the racing activity is a hobby for Penny?
Penny's racing income:
Penny's racing expense:
Gross income for tax:

Answer 1

Solution:-

Penny's racing income:	3,920
Penny's racing expense:	78.40
Gross income for tax:	3,841.60

Explanation:-

Penny must include the $3,920 of hobby revenue in gross income, but hobby expenses are deductible only as miscellaneous itemized deductions subject to the 2% of AGI floor. Penny’s hobby expenses are $16,670. However, Penny’s deductible expenses are limited to her hobby revenue and by the 2% of AGI floor. Since her  revenues are only $3,820, Penny’s maximum deduction for her hobby is $78.40, calculated as the expenses deductible up to the hobby revenue($3,920), reduced by the 2% of AGI floor for miscellaneous itemized deductions as follows: $3,920 – (2% $3,920 hobby revenue).