Kara Sears
Whether or not you are legally required to file a tax return depends on your income, your filing status, and the country or state in which you reside. In the US, federal law requires all citizens and permanent residents to file a federal tax return if their income exceeds Internal Revenue Service (IRS) thresholds. However, even if your income is below the filing threshold, you may still choose to file a tax return to claim a tax refund or a refundable tax credit.
| Characteristics | Values |
|---|---|
| Federal law requirements | All U.S. citizens and permanent residents must file a federal tax return if their income exceeds the Internal Revenue Service (IRS) thresholds |
| Income | Taxpayers must file a tax return if their gross income is over the required filing threshold |
| Self-employed status | Self-employed individuals must file an annual return and pay estimated tax quarterly if they had net earnings from self-employment of $400 or more |
| Dependents | A person who is claimed as a dependent may still have to file a return depending on their gross income |
| Taxable income | Taxable income includes earnings from your job, retirement and disability benefits |
| Deductions | The standard deduction is a flat amount that can be deducted from the total gross income |
| Tax credits | Many low-income taxpayers with children are eligible for the child tax credit, which reduces their tax payments by $2,000 per qualifying child |
| Deadlines | Taxpayers must file an accurate tax return and pay their taxes on time to avoid interest and penalties |
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What You'll Learn
Gross income
Federal law requires all US citizens and permanent residents to file a federal tax return if their income exceeds the Internal Revenue Service (IRS) thresholds. These thresholds are adjusted annually to account for inflation. Gross income means all income an individual receives in the form of money, goods, property, and services that aren't exempt from tax. This includes any income from sources outside the United States or from the sale of a main home, even if a taxpayer can exclude part or all of it.
Adjusted Gross Income (AGI) is used to determine if you qualify for certain deductions, credits, and other tax benefits, and how much you qualify for. Your AGI can be found on Form 1040, U.S. Individual Income Tax Return, line 11. Modified Adjusted Gross Income (MAGI) is your AGI with certain adjustments added back. MAGI is used to calculate certain credits, such as the Child Tax Credit and Adoption Tax Credit, and to determine if you owe the net investment tax.
Even if your income is below the filing threshold, it may still be beneficial to file a tax return. This is because you may be eligible for deductions or tax credits that reduce the amount of tax you owe, or even result in a refund. Additionally, filing a tax return provides an accurate financial picture for determining loan amounts and rates.
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Self-employment status
As a self-employed individual, you are generally required to pay self-employment tax, which includes Social Security and Medicare taxes. This is because, unlike employees, you do not have an employer withholding these taxes for you. The self-employment tax rate for Social Security is 12.4% for the first $168,600 of earnings in 2024, and the Medicare tax rate is a constant 2.9% regardless of income. These taxes are calculated using Schedule SE (Form 1040 or 1040-SR).
Additionally, as a self-employed individual, you are responsible for paying income taxes on your net earnings. You must file an income tax return if your net earnings from self-employment were $400 or more. Even if your net earnings are less than $400, you still need to report those earnings and may have to file a return if you meet any other filing requirements.
To file your annual income tax return, you will use Schedule C (Form 1040) to report your business income and expenses. If you are a sole proprietor, your business income and expenses are included on your personal income tax return, and your taxable income will be higher if your business is profitable, potentially placing you in a higher tax bracket.
It is important to note that as a self-employed individual, you may have to make estimated tax payments throughout the year, typically done quarterly. These payments are necessary because, unlike employees, your taxes are not automatically withheld from your income. However, if you expect to make less than $1,000 in a given year through self-employment, you may be exempt from paying quarterly estimated taxes.
Overall, understanding your self-employment status is crucial for complying with tax laws and ensuring you meet your tax obligations.
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Dependents
If you have a dependent who is earning an income, you can still claim them as a dependent as long as other rules are met. A dependent's earned income does not go on your tax return. A dependent can file their own tax return to claim their W-2 income.
There are two types of dependents: qualifying children and qualifying relatives. To qualify as a dependent, a child must meet the following criteria:
- Relationship: The child must be your son, daughter, stepchild, eligible foster child, brother, sister, half-sibling, stepbrother, stepsister, or adopted child.
- Age: The child must be under 19 or under 24 if they are a full-time student, or any age if they are permanently and totally disabled.
- Residency: The child must live with you for more than half the year, with some exceptions.
- Support: The child must receive more than half of their financial support from you.
- Joint return: The child cannot file as married filing jointly unless only to claim a refund of taxes paid or withheld.
A dependent cannot claim another person as a dependent on their tax return. Additionally, a dependent must be a citizen or resident of the United States, Canada, or Mexico.
In terms of filing requirements, a dependent child who has earned more than $14,600 of income in 2024 typically needs to file a personal income tax return and might owe tax. Even if a dependent child earns less than this threshold, it may be beneficial to file a tax return for them as they could be eligible for a tax refund if tax was withheld from their paycheck. A dependent child who receives more than $1,300 in investment income in 2024 is also required to file a tax return.
It is important to note that a child may only be claimed as a dependent on one return in a tax year. If the child's parents are divorced or separated, the noncustodial parent must attach a copy of the release of claim to exemption by the custodial parent to their return.
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Taxable income
Your taxable income is used to determine your tax bracket and marginal tax rate, which, in turn, determines how much federal income tax you owe. Your federal taxable income is equal to your gross income minus any eligible tax deductions. For example, if you have earned $60,000 in gross income for the year and are eligible for $12,000 in deductions, your taxable income would be $48,000.
There are several sources of taxable income, including employee compensation, self-employment income, investment income, Social Security benefits, business income, and more. If you are self-employed, you can deduct related expenses from your income so that only the profit from your business is taxed. Additionally, if your business loses money, you can usually deduct the loss from your taxable income.
It is important to note that even if you make less than the income threshold that requires you to file a tax return, you may still want to consider filing. This is because you may be eligible for deductions or tax credits that reduce the tax you owe to zero, and you may even get a refund. Therefore, it is always a good idea to consult with a tax professional or use online tools to determine your specific situation.
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Tax credits and deductions
Tax Credits
- Tax credits directly reduce the amount of tax owed by an individual. Each credit lowers the tax bill dollar-for-dollar, providing significant savings.
- The Earned Income Tax Credit (EITC) is a notable example of a refundable tax credit. If an individual's tax bill is less than the credit amount, they can receive the difference as a refund, making it a valuable tool for those with lower incomes.
- Other tax credits are available, such as the Premium Tax Credit, which is associated with enrolling in a health insurance marketplace.
- Tax credits are also available for businesses, such as the Employee Retention Credit, intended to support businesses affected by the COVID-19 pandemic.
Tax Deductions
- Tax deductions reduce the amount of taxable income, thereby lowering the overall tax liability.
- The standard deduction is a common choice, allowing individuals to subtract a set amount from their income based on their filing status. This standard deduction amount is adjusted annually for inflation.
- Itemizing deductions is another option, where individuals can claim multiple qualifying expenses, such as mortgage interest and self-employment health insurance premiums. Itemizing is often more beneficial for those with multiple properties or capital gains/losses.
- To claim deductions, individuals must provide documents that substantiate their expenses or losses. Tax software or a tax professional can assist in determining which expenses are deductible and calculating the total deduction amount.
It is important to note that both tax credits and deductions are subject to specific eligibility requirements and may vary based on an individual's circumstances. Understanding these options can help taxpayers maximize their refunds and comply with tax laws.
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Frequently asked questions
Federal law requires all U.S. citizens and permanent residents to file a federal tax return if their income exceeds the Internal Revenue Service (IRS) thresholds.
Taxpayers may have to pay a penalty if they are required to file a return but fail to do so. If they willfully failed to file a return, they may also be subject to additional fines and possible criminal prosecution.
Taxable income includes earnings from your job, retirement and disability benefits, and unearned income such as interest, dividends, and capital gains. You can use the IRS online interview tool or the IRS' filing threshold chart to determine if you need to file a tax return.
The standard deduction is a flat amount you can deduct from your total gross income. It varies depending on your age and filing status. Most taxpayers are eligible to take the Standard Deduction.
You may need to file a tax return if you received advance payments of the premium tax credit for enrolling in a health insurance marketplace, or if the law requires you to pay additional taxes on qualified retirement plans.
