Expert answers financial queries

Roger asks:

I put money into my flexible spending account at work for both medical and dependent care.

The money goes into the account pre-tax.

Any money left in my account at the end of the year I forfeit.

If a medical bill is paid out of my flexible spending account can I still deduct it on my taxes as a medical expense?

What about the dependent care? Can I take the credit for child and dependent care expenses? Thanks, Roger

Response:

If you paid for your medical expenses out of your flexible spending account, then you paid for them with pre-tax dollars; therefore you don't get to deduct them again.

For more information please see IRS publication 502.

As for your dependent care expenses, again you are not allowed to deduct anything that you already received a pre-tax benefit on; however you may have a credit if you had expenses in excess of the amount you paid out of your flexible spending account.

For more information please see IRS publication 503 and Form 2441. Best wishes, Gina

Hobby rules unfair Karen from Michigan asks:

I just read your post about hobby income. The rules seem somewhat bizarre, in that it seems as if someone who is deliberately trying *not* to make a profit -- merely asking to be reimbursed for the cost of raw materials for something she makes to give to another person -- would end up paying income tax on what is essentially a reimbursement.

I desktop-publish fanzines -- amateur collections of stories and art.

Tax Tips

Gina L. Gwozdz

The standard price in the fanzine community is calculated at 10 cents per black and white page plus one dollar for every fullcolor page: in other words, people are charged just the cost of running one off at a copy place (not counting the binding).

No one is supposed to make a profit off of the community.

I didn't mind putting in hundreds of hours on a labor of love -- even though

definitely spent more on ink and toner and paper than I took in, but it's disconcerting to find that because I'm the one who did the copying work, the payments I got -- essentially reimbursements -- are

income."

The next time someone asks me to run off a copy of one of the "zines" I publish,

may have to decline -- I can't afford to pay the government $3 for each "zine."

Yet I can't declare that it's a business, because on the first page of each

zine," it clearly states that there's no intention to make a profit.

Is this really the way it is?

If a jewelry maker makes a necklace for a friend and asks the friend to just pay her back for the raw materials, is the jewelry maker stuck with having to pay taxes on that

income"?

If an amateur photographer photographs a friend's wedding for free, but the friend pays him back for the film, the photographer has to pay taxes on it?

Something about this doesn't seem right.

My response:

I agree that I don't think the rules for reporting hobby income and expenses are fair.

Your income would be reported as "miscellaneous Income" and you expenses would be reported as "Miscellaneous Itemized Deduction," which has various limits and most do not receive a benefit from it.

This usually results in exactly what you stated, you're reporting the income (the reimbursements) and no expenses.

This is just one of the reasons why, in my opinion, a good tax consultant is worth their fees.

They will tell you how to make the most of situation such as this.

The advice I provide my clients who are in a situation such as yours is to convert your hobby into a legitimate business, because that is the best way to get around these rules (in my opinion and yes there is another way).

I realize you said that this publication is not for profit and that is not their intent, but your intent can be to make a profit.

Once your intent is to make a profit from doing the same thing, in your case, desktop publishing, then you can report your income and expenses on Schedule C, showing a loss and taking a loss until you do finally make a profit.

I consider it my job to help my clients find ways to try and make a profit (or increase their profit) in the future and make sure they document their efforts trying to make a profit.

For your situation, these things would include (the rest of which you read in my other article):

! Finding someone who has made a profit from desktop publishing and asking them to be your mentor.

! Make yourself some business cards and disperse them, documenting as best as possible where they have been dispersed.

! Advertise your business and skills seeking additional work.

Obviously more than the three things above would need to be done, but that is an excellent start.

!

Gina L. Gwozdz is a Bullard resident and certified public accountant. You may reach her via her web site at http://glgcpa.blogspot.com/