Do I Have To File A Federal Income Tax Return?

 “If it makes you smile, you gotta file.”

Identify all of your sources of income

When it comes to taxes, the first thing you need to do is determine whether you are even required to file an income tax return in the first place.  And since it’s an income tax return, the easiest, most intuitive way to get a handle on whether you have an April 15^th tax filing requirement is to first list all of your sources of income for the prior year.[1]  To be comprehensive, don’t worry right now about whether the income may or may not be taxable; just list the source of any money or property that you received during the year, which may include:

• Salary, wages, bonuses, commissions, or any other kind of employee-based compensation or earnings[2]
• Interest and investment income (dividends, gains from the sales of investments, etc.)
• Gross self-employment (or “side business”) income[3]
• Social Security
• Scholarship income[4]
• Any other type of income.

Now that you’re thinking about all of your sources of income for the prior year, there are a few that you can scratch off your list, because they don’t count as “income” for tax purposes.

1. Gift income and other support – While there may be tax implications for the giver of substantial gifts (those exceeding $13,000), there are none for the person receiving the gift.
2.  Inheritance income – Similar to gifts, there may be income tax implications for the estate of the deceased individual, but there are none for the beneficiary of an inheritance.
3. Loan proceeds – Loan proceeds are considered debt, not income, so cash you receive from any kind of loan is not taxable.

Now that you have a better handle on what counts as “income” for tax purposes, here are the tax filing possibilities that lie before you.

1. Your income exceeds a certain threshold and you are required to file a tax return.
2. While your income may be below the applicable thresholds, you should file a tax return because it’s to your advantage to do so.
3. You are relieved from the burden of filing an income tax return because your income is below the necessary threshold and you don’t have any tax benefits to claim by doing so.

For this article I will focus primarily on Item #1, or determining whether or not you are required to file a tax return.

When are “regular people” required to file a tax return?

If you’re a “regular person” living on your own (meaning you’re no longer a dependent of your parents or a guardian) and you earn most of your money by working, you aren’t required to file a federal income tax return unless your total income for tax purposes exceeds $9,500 (or $19,000 if you’re married).

Example

You’re single, 25 years old, and you just received a $15,000 inheritance from your grandmother.  You use this money to go back to college for an advanced degree.  You also get a student loan of $10,000.  You deposit both the inheritance and the student loan in a savings account and draw upon it as needed for tuition, books, and living expenses.  This account earns $300 of interest over the course of the year.  Also, to make ends meet, you decide to work part-time while taking classes and make an additional $5,000.

In this case you are not required to file an income tax return because your “income” for the year was only $5,300 ($5,000 wages plus $300 of interest), which is below the tax filing threshold of $9,500 for a single person. Remember, the $15,000 you received as an inheritance and the $10,000 school loan are not considered income for purposes of the tax filing purposes.

Self-employed individuals have strict tax filing requirements

The most stringent requirement for having to file a tax return for regular people has to do with self-employed individuals.  For purposes of this test, “self-employed persons” are those who are in business for themselves (which includes having a little “side business”).  It also includes those who are “independent contractors,” as well as those who are partners in a partnership. The rule is this: self-employed people must file a tax return if their net earnings from self-employment are $400 or more.

Example

Let’s assume that you’re still that student above, and that your “income” from wages and interest is still $5,300.  During the year you notice that students like to wear tee shirts having to do with the school’s sports teams.  To make a little extra money, you spend $300 designing and making sports shirts and sell them over the course of the year for $1,000.  Thus, your net income from self-employment was $700 ($1,000 less $300).

Your gross income from self-employment ($1,000) is counted as part of your total income form tax purposes, which is now $6,300 ($5,000 wages, $300 interest, and $1,000 of gross self-employment income).  That’s still below the $9,500 tax filing threshold for a single person.  However, since your net self-employment income of $700 exceeds the $400 threshold, so you are required to file a tax return.

Dependents are not necessarily exempt from filing tax returns

Contrary to the belief of some, there is no automatic tax filing exception for “dependents” solely based on their age.[5]  This is a very important concept, so let me say it again in another way.  No matter how young someone is (it could be an infant) or how reliant one might be on others (they could be someone that’s 100 years old, living under the care of a relative, unable to do anything for themselves), even if you’re a dependent you have to file income tax returns if you meet any 1 of the 3 following tests.

1. Your employee-related earned income was more than $5,800.
2. Your unearned income, or income from interest, dividends, and gains on the sale of investments was more than $950.
3. Your gross income was EITHER more than the larger of $950 OR your earned income up to $5,500 plus an additional $300.

Of the 3 tests, the third one is definitely the most confusing.  It addresses the situation where earned income is below $5,800 and unearned income is below $950, but on a combined basis they exceed the “either/or” threshold outlined above.  Where the third test particularly comes into play if you’re a dependent is if you have a decent amount of earnings and you have more than $300 of investment-type income.

Example 1

You earned $4,800 in wages during the year and also received $200 of interest income from a savings account.  You do not have to file a tax return because your earned income is less than $5,800, your unearned income is less than $950, and your gross income of $5,000 ($4,800 plus $200) is less than the “either/or” filing threshold amount of $5,100, which is equal to your earned income of $4,800 plus $300.

Example 2

You earned $1,000 in wages during the year, and you also received $350 of interest and investment-type income.  While your earned income is less than $5,800 and your unearned income is less than $950, you still have to file a tax return because your gross income of $1,350 ($1,000 plus $350) is greater than the “either/or” filing threshold amount of $1,300, which is equal to your earned income of $1,000 plus $300.

As a note to parents, if you have a child that has a tax filing requirement because their unearned income exceeded the $950 threshold and they have no other sources of income (from wages, for example), you may have the option to simplify things by reporting their income on your return rather than having them file their own.  To see of you qualify refer to IRS Publication 17, chapter 30.

Do seniors qualify for any tax filing exemptions?

Given that a substantial number of seniors are among the nation’s millionaires and billionaires, you can be sure that age alone does not exempt anyone from having to file a tax return.  But what about seniors at the other end of the financial spectrum, those who are struggling just to make ends meet?  Do they get any tax filing breaks beyond those granted to “regular people?”  The answer is yes, and it has to do with how Social Security is treated.  Specifically, when seniors are evaluating whether their gross income exceeds the tax filing threshold of $9,500 (19,000 for married couples), Social Security does not have to be considered as “income” unless one half of the Social Security benefits plus other gross income (including any tax-exempt interest) is more than $25,000 ($32,000 for married couples).

Example 1

A widow over 65 received $13,000 in Social Security benefits.[6]  She also worked a few times a week, making $1,500 over the course of the year.  To cover other expenses she drew $1,000 from a regular savings account.  The savings account generated $400 of interest income.  Given these facts, did the widow meet the $9,500 tax filing requirement?  At first it might seem like she did, because her total “cash income” for the year was $15,900.  However, upon closer examination the widow does nothave to file a return because her total income for purposes of the tax filing threshold was $8,400, just below the $9,500 filing limit for a single person.  This is illustrated as follows.

Example 2

Assume the same facts as above, except that instead of withdrawing $1,000 from a regular savings account to cover living expenses, the widow took it as a distribution from a tax-favored retirement, pension, or individual retirement account (or “IRA”).  If that were the case then the widow’s income for purposes of the tax filing threshold would increase from $8,400 to $9,400, which is still below the tax filing limit of $9,500.  However, by taking a retirement account distribution the widow will automatically be required to file a tax return (see the section “Other reasons you may have to file an income tax return” below).

Finally, for purposes of the tax filing test, Social Security benefits have to be fully counted as income (meaning you don’t qualify for the 50% exemption) if you’re married filing a separate return (as opposed to a joint return) and you lived together at any point during the tax year.[7]

Advance Earned Income Credit Payments

If you received advance earned income credit payments in your paycheck then you must file a tax return.  However, this would only occur if you provided your employer with a completed IRS Form W-5, “Earned Income Credit Advance Payment Certificate.”

To provide just a little more background, the earned income credit is a tax benefit that’s available for qualifying individuals who have earned income, but they don’t make very much money.  Those to whom the credit applies often get tax refunds after they file their tax returns (see more on this below).  However, rather than wait for a lump sum in the form of a tax refund, some people would rather have more money in each paycheck in the form of advance earned income credits payments (which, again, is the purpose of completing Form 5).

Other reasons you may have to file an income tax return

If you’re still reading this article then it’s probably for 1 of 3 reasons.

1. You’re captivated by my writing style (unlikely),
2. You’re very thorough (likely), or
3. You’re awfully close to not having to file an income tax return.

What I have reviewed so far are the rules that are most likely to cause regular people to have an income tax filing requirement.  However, it’s still possible that you have something else going on that will trigger an automatic filing requirement.  Here are some of the more likely remaining possibilities.

• You owe Social Security and/or Medicare on unreported cash wages such as services or tip income.  Does this mean the IRS is going to come crashing through the door and cart off your child if they don’t report Social Security and Medicare taxes on a little bit of babysitting income?  As a practical matter, no, probably not (though technically it is reportable for tax purposes).  However, if you receive more than a nominal amount of cash from services or tips then this is something you need to pay attention to.
• You took taxable distributions from a plan such as an IRA, 401(k), education savings account (or “ESA”), an Archer Medical Savings Account (or “MSA), or some other type of tax-favored account (this is what caught the widow in Example 2 in the “Seniors” section).

If neither of these factors applied to you then you’re at the homestretch, but be aware that there are still some obscure rules remaining that could cause you to have to file a return.  These remaining tax filing requirements fall into 3 categories.

1. “Recapture rules” apply to you – This would occur if you had previously claimed a federal tax benefit, but now you no longer qualify.  For example, let’s say (and I’m making this up) that your qualified for a $1,000 Federal tax benefit to complete 2 years of technical training, but you dropped out after the first year.  By not completing the second year you could be subject to “recapture rules,” meaning you would have to pay back the Federal government $500 for not completing the second year of your training.  So again, think about whether you’ve received any special federal tax benefits for which you may no longer qualify.  If that’s the case then recapture rules could potentially apply, but if not then you don’t have anything to worry about.
2. You owe “alternative minimum tax” – Without getting into a long-winded explanation of the alternative minimum tax (or “AMT”), I will say that it’s extremely unlikely to apply if you fall below the income thresholds listed above.
3. Household employment taxes – This would only apply to you if you paid $1,000 or more of cash wages to a household employee (such as a gardener or cook), something that would be very unlikely for a regular person who has income below the filing requirement threshold!

If you’ve gone through this entire process and still think you don’t have an income tax filing requirement, the last thing to do is read over the section, “Do I Have To File a Return,” on page 5 in the IRS’s Publication 17, paying particular attention to Table 1-3, “Other Situations When You Must File a 2011 Return.” [8]  If you don’t understand something on the table then you first need to apply some common sense.  For example, you might not have a clue how the first-time homebuyer’s credit works, but if you didn’t buy a home then you can be sure that it doesn’t apply to you!  In summary, for purposes of determining whether you need to file a tax return, it’s often more practical to determine if a tax rule doesn’t apply to you than it is to understand exactly what the rule is and all the details of how it works.

What if you’ve living outside of the United States?

As a final exception, what if you don’t even live in the United States?  Do the tax filing requirements still apply to you?  The answer is whether you’re herding camels in the Sahara, painting on street corners in Paris, or living in an underground cave on the dark side of the moon, if you’re a U.S. citizen or a green card holder with a heartbeat anywhere in the known universe and you meet any of the requirements above then you have an income tax filing requirement (although you many not necessarily owe any taxes with your return).

You “should” vs. you are “required” to file an income tax return

In conclusion, I want to remind you that the focus of this article has been on helping you determine whether you are required file an income tax return as opposed to whether you should file an income tax return.  In other words, if you follow the entire process outlined above and you don’t exceed any of the applicable income thresholds, and none of the automatic filing triggers apply to you, it’s true that you don’t have to file an income tax return.  However, it may still be to your advantage to do so.

But why would you want to go to the trouble to file a tax return if you didn’t have to?  The main reason is to obtain a tax refund from the government that you would lose if you did not file a tax return.  There are 2 common situations where regular people should strongly consider filing a tax return, even when it’s not required.

1. To get a refund for Federal income taxes deducted from your paycheck over the course of the year when a properly completed tax return will show you didn’t owe any tax at all (or at least you owed less tax than was withheld from your paychecks).
2. To claim the earned income credit (or “EIC”).  This is the Federal tax program referred to above, which is designed to help low-income individuals and families.  The EIC is what’s known as a “refundable credit,” meaning that if you qualify, you can get a tax refund from the Federal government even though you didn’t make enough money to owe taxes (or the taxes you do owe are less than the total EIC you’re qualified to claim).

In summary, based on the rules outlined in this article, you might flat out be required to file an income tax return.  On the other hand, it may turn out that you’re not required to file a tax return but, as I just pointed out, there are common situations where you should because it’s in your best interest to do so (meaning you’re due a tax refund).  And finally, if you don’t have to file a return and you wouldn’t benefit financially from doing so then don’t worry about it, because you’re off the hook![9]