Demystifying Individual Tax Responsibilities: Do you Need to File this Year?

Most clients are aware of the basic structure of a tax return: report gross income, and claim certain deductions (both can take numerous forms).  Most are also aware of the standard deduction on 1040s, which is often used by taxpayers with relatively simple tax situations.  What happens when the standard deduction amount is higher than your gross receipts?  Barring certain facts (which are explored later), in this simplistic example: zero income tax would be computed.  In such cases, you may not be required to file an income tax return for the year.  

This structure – relatively low gross income, and demographic information which leads to a higher standard deduction, is more common amongst those who are retired, with minimal investments or other income-generating activities.  

As simple as this sounds, the list of exceptions or other facts which absolutely require you to file a tax return is much longer and more involved than the simple situation just described.        

The approach to filing should be: assume you need to file a tax return, unless your facts and circumstances very specifically don’t hit any of the triggers which require you to file.  

Per the IRS, generally, you need to file if:

• Your gross income is over the filing requirements [Note - this is the situation described earlier… these filing requirements are published by the IRS, and are roughly commensurate with the standard deduction applicable to your situation.]
• You have over $400 in net earnings from self-employment (side jobs or other independent work).  [Note - tax calculations rapidly complicate with self-employment.  If you had more than $400 coming in the door from self-employment, you need to file a return.]
• You had other situations that require you to file:
  • You must file a return if any of the conditions below apply.
    • You owe any special taxes reported on Schedule 2 (Form 1040), including any of the following. (See the instructions for Schedule 2 (Form 1040).)
      • Alternative minimum tax.
      • Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account.
      • Social security or Medicare tax on tips you didn't report to your employer or on wages you received from an employer who didn't withhold these taxes.
      • Uncollected social security, Medicare, or railroad retirement tax on tips you reported to your employer or on group-term life insurance and additional taxes on health savings accounts.
      • Household employment taxes.
      • Recapture taxes.
    • You (or your spouse if filing jointly) received Archer MSA, Medicare Advantage MSA, or health savings account distributions.
    • You had net earnings from self-employment of at least $400.
    • You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes.
    • Advance payments of the premium tax credit were made for you, your spouse, or a dependent who enrolled in coverage through the Health Insurance Marketplace. You or whoever enrolled you should have received Form(s) 1095-A showing the amount of the advance payments.
    • You are required to include amounts in income under section 965 or you have a net tax liability under section 965 that you are paying in installments under section 965(h) or deferred by making an election under section 965(i).

As you can see, the scenario where individuals might not need to file taxes is considerably less common and has a lower probability compared to the situation where filing is necessary.

Note that the scenarios described above do not necessarily mean that you will owe tax with your return; regardless of how many deductions you might have, etc., you still need to file if any of these facts are present.

Why You May WANT to File

Actually, there are situations where a taxpayer which is not technically required to file, may want to, because they have money coming back to them.  If you filing situation results in a refundable tax credit (e.g., Earned Income Tax Credit, Child Tax Credit, American Opportunity Tax Credit, Premium Tax Credit), you might should file.  Likewise, if your paycheck had federal income tax withheld or you made estimated tax payments, you might have overpaid – without filing a tax return, you likely will not receive your refund.

In Summary

Most clients’ tax situations are beyond the fully retired, zero-income hypothetical situation described earlier.  Make sure you are correctly understanding your filing requirements, as well as the possibility of receiving money back on your return.

We are happy to help by analyzing your specific facts and circumstances, and can help ensure you have the correct answer for this year’s tax season.