Every tax season I get calls from clients with a “quick question:” Do I need to file a tax return? I only made seven grand (or some other small amount).
We’re dealing with tax law, so I hate to tell you this, but there’s practically no such thing as a quick question or quick answer anymore. It’s easier to untangle fives miles of Christmas tree lights than to answer a quick tax-related question.
Most people are aware that there are income requirements for filing a federal income tax return. Most people also think that if their income falls below those income requirements, they don’t need to file. This is not necessarily so, in fact, in many cases, filing a tax return will get you an unexpected income tax refund. And naturally, in other cases, where filing is required even if below the income thresholds, you will pay the tax man.
Here are the exceptions to the income thresholds:
1.) If you are self-employed with earnings of $400 or more, you are required to file an income tax return. The self-employment tax, which funds your Social Security, kicks in at that level. You especially want to do so if you have write offs that will result in a net operating loss, which can be carried back to get refunds from taxes paid in prior years or carried forward to offset income in future years.
2.) You may be below the income thresholds for filing, but if you have W2s, 1099s, or other forms indicating federal and state income tax withholding, you will likely enjoy a refund of those taxes as well as the refundable Making Work Pay Credit.
You may be able to file for free by going to www.irs.gov to file electronically. There is no need to pay tax preparation fees if you only have a W2. If you are computer savvy, you can easily follow the simple instructions to file and get your refund.
3.) If you have earned income (W2s, small profit from self-employment, etc.) you may be eligible for the Earned Income Tax Credit. This is something of a reverse-welfare system that provides tax dollars to low income singles and families who work. Taxpayers can receive as much as $5,666 back after filing their federal income tax return. The amount you receive is dependent upon your income level, your filing status and the number of children in your family.
4.) By the same token, if you received Advance Earned Income Tax Credit for this tax year, shown in Box 9 of your form W2, you will be required to file. These amounts must be reported and adjusted to the EITC for which you qualify.
5.) If you took a distribution from your retirement plan and you were under age 59 ½, you must report the income to determine if you are liable for the 10% excise tax for taking an early distribution. There are some exceptions to the penalty and those must be indicated on the tax return. Otherwise, you report the income and pay the penalty on your tax return.
6.) Speaking of retirement plans, you may be liable for income taxes if any of the following are true:
a) Made excess contributions to your IRA or MSA
b) Were born before July 1, 1939, and you did not take the minimum required distribution from your qualified retirement plan.
c) Received a distribution in the excess of $160,000 from a qualified retirement plan.
7.) If you received tips that you did not report to your employer you are required to file an income tax return to report and pay income tax, Social Security, and Medicare tax on them.
8.) Perhaps you will not owe income tax, but you may owe Alternative Minimum tax or recapture tax on certain types of income you receive. You may also have carry forwards from prior years that should be reported. Check with your tax advisor.
9.) If you retained household help and are required to deposit household employment taxes, you may do so on Schedule H without filing a complete income tax return.
10.) Perhaps you sold stock at a loss and are thinking: why bother filing? First of all, the IRS is only aware that you sold stock. They aren’t privy to whether you made a profit or took a loss. Not for 2010 anyway. Beginning next year, stock brokerage firms will be required to report that information to the IRS. If you don’t file to show the losses, the IRS will assume you made a profit and send you a bill. You also want to be sure to report the loss even if it doesn’t affect your tax situation for the current year. You will enjoy a loss carry forward to future tax years to offset other income.
This is not a complete list of reasons to file a tax return. This is just the “quick answer.” If your income was below the filing thresholds and you wonder about whether or not you should file a tax return this year, check with your tax professional.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.