Taxpayer asks:
I saw on twitter that you ran a race this year so maybe you can help me. I run a number of races throughout the year and I occasionally win some money. My friend told me that I have to include that money on my taxes. Can I deduct the cost of the entry fee against the money that I won?
Taxgirl says:
Yep, I ran my first race last year. It was the Rothman 8k as part of the Philadelphia Marathon. I am not a serious runner but I had a respectable finish. Actually, I was just glad to finish! 😉
As to your question, yes, your friend is right. You must report your winnings on your income taxes.
Here’s the tricky part: you must decide if your running is a business or a hobby. Since you said that you ran “a number of races” and only “occasionally” win some money, it sounds as though you run as a hobby. If running – or any other sport – is your hobby, then you would report winnings as “other income” (line 21 on your federal form 1040).
There is some good news. You can claim deductions against your winnings but only if you itemize. You would include your related running expenses as “miscellaneous itemized deductions” on your Schedule A (not on a Schedule C, that would only apply if running was your business). Expenses could include your entry fees, your running shoes and any other expenses which are directly related to running. Be aware that those miscellaneous itemized deductions are limited to those in excess of 2% of your AGI (adjusted gross income). For example, if your AGI was $40,000, you could only deduct expenses which were more than $800 (2% of $40,000). If you paid $1000 in entry fees and running shoes, you could actually deduct $200.
There are other limitations. If you treat running as a hobby, your deductions are limited to the amount of your winnings. Additionally, you can’t carry excess deductions forwards or backwards. So, if you’re like me and you pay an entry fee to run but don’t win anything, you can’t properly claim any running-related deductions. But that’s okay – I’m only running because I like it (so it’s a hobby). And for the shoes.
How can you tell if running is a hobby or a business for you? The IRS looks at a number of factors. In this case, there are two big factors which likely make running a hobby for you: your motive and your winnings. The IRS assumes that you’re in business to make money. It sounds, from your post, as if you run because you enjoy it and not to make money. There’s nothing that says that you can’t enjoy your business, but if you’re running primarily because you like it and not to make money as your main motive, it’s likely a hobby. Additionally, I’m guessing that you haven’t grossed more than you’ve spent for most of the last five years – the IRS assumes that a business will eventually make a profit. For more on the hobby rules, see my prior post about hobby income tests and Mary Kay.
There you go. Happy running!
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
Just had to drop in and say I think it’s wonderful you’re doing these races! My 9 yo son and I walk the Seattle Komen Race for the Cure every year, and it’s so moving to see that many people joined for a cause. Unfortunately, the Seattle event is scheduled for a Sunday this year and I’m not sure we’ll be able to attend 🙁