As April 15 approaches ... more tax questions

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Posted By: Eric B

I know there have been tax threads before, but these are new questions as far as I know.

I didn't make a whole lot in 06 selling cards, but did end up making some (and almost all of it went back into cards). I plan to claim it as ordinary income under "other income" on the 1040 form, and as "income from activity not engaged in for profit".

Questions:

Is it better to use 1250 Sale of Collectibles? It's not a whole lot of money, and I will pay more tax by claiming it as ordinary income than the 28% collectibles rate. I'm thinking I'd rather just claim it as ordinary income and keep my records and calculations attached to my personal copy of the return (in case of audit) than have to find another form. This should be okay, as long as I'm paying a higher rate, right?

IRS says that hobby expenses are deductible only to the extent of hobby income. I don't plan on deducting ebay fees, etc, but do some of you others deduct expenses (not as an itemized deduction, but as an offset to income before you report the income)?

Do you also offset losses from card sales, and grading fees?

Thanks to anyone who has snored their way to this point of the post and feels like ringing in.

This is the first year I've really sold cards, and I ended up a little bit ahead - and I definitely plan to claim it as income. No way I want to get off on the wrong foot in that area.

If you did not show a profit in 3 out of 5 consecutive years, then you can use the other income line of the 1040. And yes, you can deduct related expenses up to the amount of your income. But only if you itemize using schedule A which almost everyone does who owns a home.

The question is - how do you determine income? If you purchased a card for $1,000 a few years ago, then sold it in 2006 for $2,500, then your income is $1,500. If you paid $200 fees on the sale you can deduct those and therefore your other income is $1,300. You would do the same calculations for every card you sold during the year. And you can subtract losses too, as long as you don't get below zero in total of all your transactions. BTW, you should deduct fees - the IRS wants you to pay your fair share and this is a fair deduction.

Now here's where people can get in trouble. Let's say you sold that one card for $2,500 which resulted in income of $1,300 after fees. So then you purchased another card for $800. Many would say they now have income of $500 for the year. But that's not true. Your income is still $1,300 and you have a basis (think inventory cost) of $800 that you use to calculate income in another year when you sell that card.

This is the recommended way to do it. I have never heard of Form 1250 so I assume there are many limitations to that. If you have been making a profit for several years, it is considered a business and you use Schedule C. The calculations are the same, but there is more visibility to the IRS, not just a single number on a single line using the other method.

By the way, here is a legitimate tax planning method to lower taxes. Same example with income of $1,300 that is taxable income. But you remember you purchased a card for $1,200 years ago that turned out to be a reprint. Sell it for $1! You have a loss of $1,199 that you can apply to your $1,300 so you only have to pay taxes on $101. If you sold the reprint in a year you didn't have income, that deduction would be wasted. Those are tricks (albeit a simple one) that makes Accountants valuable to Corporations.

I hope this was brief and understandable.

Eric