Do I Need to File a Tax Return?

You do not have to file a tax return if your total income
doesn’t exceed a certain level.  That doesn’t mean you don’t have a reason to file.  Your employers may have withheld
money from your checks to pay for Federal taxes.
If you don't owe, you are entitled to get that money back!


How much, or actually how little, does a single person have to make before they don’t have to file taxes and/or, secondly, owe nothing in Federal income taxes? 

Actually those are two separate questions and are, like so much about taxes, not necessarily so simple to answer.

Assuming a single (unmarried) individual brought in no more than $10,350 in 2016 from W-2 income, interest income or unemployment, they would not have any taxes due on that income.  This is because the value of the standard deduction for 20162 ($6,300) and their personal exemption ($4,050) was a combined $10,350.

A married couple filing jointly would be in a similar position of not owing any money in Federal taxes if together, and assuming again their income was derived from identical sources, their income didn’t exceed $20,700. 

That doesn’t mean they wouldn’t have a reason to file a tax return.  If any money was withheld for Federal taxes for their W-2 work they would want to file to get that money back. 

For the Single person in this position filing could have further benefits.  In addition to receiving whatever withholding that may have been kept back from his/her checks for Federal tax payments, it is possible that they would qualify for a program called Earned Income Credit (EIC) where the Federal government compensates those who have worked to earn at least some of their income but don’t have a total income above a certain level.

To give you an idea of how this compares to the overall income within the country, according to the U.S. Census in 2010 the median household income in the United States was $49,445.  Using that amount as the income on this return the total tax bill for this family would have been $2,604 with the Child Tax Credit eliminating $2,000 of that tax for the family. Therefore the amount this family would have had to pay out of pocket would have only been the remaining $604.

A retired couple, married and over 65 who are both receiving Social Security totaling $45,000 could receive another $17,000 from several sources for a total of $62,000 of income and not have to worry about paying any Federal Income taxes as well.  That’s because the bulk of their Social Security income is not taxable and their standard deduction and personal exemptions cover the additional taxable income.

There are plenty of areas in the country where one can retire quite comfortably on $5,000 a month in untaxed income.

So, depending on the overall situation there are numerous scenarios whereby a person may not have to pay any Federal taxes but may still have to file a tax return to prove that to the IRS.

I told you upfront it wasn’t quite so simple an answer. You can see how easy it is to get off the mark there. And what you just read was only some of the answer.

CASH or 1099-MISC INCOME

If you made as little as $400 in cash income (again that means by cash, check or on a 1099-MISC) then you MUST file a tax return. You may not receive a tax form for that kind of money but legally you are supposed to report every dollar you earn. (Our job is to make sure you know the rules.)

Although it may not make sense that you have to file even if you don't owe Federal taxes (that amount is significantly less than the standard deduction and/or the personal exemption which whould eliminate any liability for Federal taxes), but at slightly more than $400 you may owe Self Employment taxes. In order to prove you do or don’t owe those taxes, you have to file a return.  (You can read in greater depth about Self-Employment taxes elsewhere in this web site.)

If the only tax statement you receive is one 1099-MISC indicating you earned as little as $600 in untaxed, non employee income, then, as it is an amount greater than $400, you have to file a tax return.  Once again, you may not owe any Federal income taxes but you may owe the self-employment taxes and the IRS is responsible for collecting them.

OTHER REASONS TO FILE

I have indicated above that you do not have to file if your total income doesn’t exceed a certain level.  That doesn’t mean you don’t have a reason to file.  Again, your employers may have withheld money from your checks to pay for Federal taxes. Most people want that money back if they don't owe anything.

In addition, the IRS doesn’t know automatically what your filing status is and/or whether or not you have any dependents you can claim.  If you do, and as the story above indicates, you could well be allowed to qualify for Earned Income Credit worth several thousand dollars even if you didn’t make a whole lot of money. 

In fact, it is available only to those who didn’t make a whole lot of money as the story below proves.

LESSONS TO LIVE BY

I was contacted in early December by a woman who hadn’t filed her taxes in the last ten years and both the IRS and the state of California wanted to know why.

Lesson One: The IRS rarely contacts you if you haven’t filed unless they believe you owe them. They’re not always right, but if you don’t hear from them then apparently you don’t mind the government keeping your money for itself.

Like most taxpayers my new client inevitably believed the IRS was correct, especially as they were demanding returns for seven of those ten years.  Without deductions they were simple returns, what the IRS refers to as 1040 EZs and, after I had prepared the first four years, I had to break some bad news to her.  She didn’t owe a penny. In fact for those four years she had been due refunds of more than $12,000 from both the IRS and the state of California.  Unfortunately there is a time limit for receiving refunds of three years past the date they were due (usually April 15th.)  That meant she had lost that money simply because she hadn’t filed anything on time.

It is not at all uncommon for taxpayers who haven’t filed for several years to be scared when they first come in the door.  The first thing I let them know is our house record for unfiled returns by a client is 13 years.  Most of them relax right away.  But what’s sad is that about ¾’s of the time the clients learn that they lost their refunds by filing late.

Lesson Two: File on time unless you have a VERY good reason

When I asked her why she had let these years go by she said she had been lazy.  She had purchased tax preparation software for her computer in a couple of those years and when it looked like she was only going to receive a little bit of money she hadn’t even bothered to finish preparing the state returns.  She hadn’t thought it was worth the trouble.

Unfortunately she hadn’t filled out the software properly and the software didn’t know she had a son and therefore could file as a Head of Household, with a second exemption credit and receive child tax credit.

Lesson Three: Be careful before you decide to prepare your own taxes.  Although computer software may “guarantee the figures are accurate” they don’t allow for operator error. 

I asked her why she made the choice to do it herself.  She was proficient with computers (that’s her profession) plus she was concerned about the potential cost to have the returns done professionally.  Because they were EZ returns I told her my office wouldn’t have charged her more than $85 per year.  Heck, the computer software, plus the state filing plus electronic filing costs almost that much.  She ended up losing more than $12,000 trying to save herself $340.

Lesson Four: Don’t be “Penny wise and Dollar foolish.” (Thank you Ben Franklin)

Now that she knew she would probably be ahead on the remaining three years (2008, 2009 and 2010) we finished those as well.  The story ended happily for her with refunds that totaled more than $13,000 she could still receive.  It may have taken a couple of months for the processing of the returns, but eventually she got the checks. 

But it was still difficult for her to admit she lost $12,000 because she was lazy and then, after ten years, became scared of what the results “might” be. 

So my final lesson is always file your taxes and do it on time.  Then you never have to be afraid of those scary ghosts under the bed. 


2017