This is a question many taxpayers ask during this time of year, and the question is far more complicated than people believe.
- When You Are Required to File
- Self-Employed Taxpayers
- Filing Thresholds
- Benefits of Filing Even When Not Required to File
- Refundable Tax Credits
To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to the individuals’ BENEFIT to file a return even if they are not required to file.
When individuals are required to file:
- Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds generally are the same amount as the standard deduction for individual(s).
- Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
- Taxpayers are also required to file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for health insurance through a government Marketplace and received a higher advance premium tax credit (APTC) than they were entitled to, are required to repay part of it. Therefore, all individuals who received an APTC must file a return to reconcile the advance payments with the actual credit amount, even if their income is less than the filing threshold amount and even if they don’t need to repay any of the advance credit.
- Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.
When it is beneficial for individuals to file:
There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:
Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return.
Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
Child Tax Credit – This is a $2,000 credit for each qualifying child, a portion of which may be refundable for lower-income taxpayers, and phases out for higher-income taxpayers.
American Opportunity Credit – The maximum for this credit for college tuition paid per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of the credit is refundable when you have no tax liability, even if you are not required to file.
Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government Marketplace. To the extent the credit is greater than the supplement provided by the Marketplace, it is refundable even if there is no other reason to file.
Don’t procrastinate on filing your taxes!
There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So, the refund period expires for 2019 returns, which were due in April of 2020, on April 15, 2023.