This post was reviewed and updated on July 21, 2021.
You just read my post on tax filing requirements (thanks!) and discovered you don't have to file a Form 1040 this year.
So, as fictional television attorney (though not a tax specialist) Jimmy McGill might say, "'S'all good, man."
Right? Not necessarily.
Sometimes even if you don't have to file a federal tax return, it's to your benefit to do so. Here are 10 situations when you should send the Internal Revenue Service a return:
- You're due a refund. This often is the case if you had federal income tax withheld. The only way to get any of that prepaid tax money back as a refund is to file a 1040. This also is the case for folks who are required to file, but don't mess with the process because they don't owe tax.
I've personally known folks who just didn't bother to file. From a financial perspective, it was an unwise move since they were due a small refund. I firmly believe that you should never give Uncle Sam money he's not due, even if it isn't much.
And yes, not filing technically is breaking the tax law. But since the penalty for not filing is based on the amount a taxpayer owes, there's no consequence, other than not getting your refund.
- You qualify for the Earned Income Tax Credit (EITC). This tax break for lower- and middle-income workers is, as the name says, a credit, which means it reduces any tax you owe dollar-for-dollar. It's also a refundable credit, meaning you can get a tax refund even if you don't owe any tax. The amount of the credit and its income thresholds are adjusted annually for inflation, with as much as $6,557 available filers with families and $529 for eligible single taxpayers on their 2019 returns.
- You qualify for the refundable portion of the Tax Cuts and Jobs Act's (TCJA) new child tax credit. Like the EITC, this additional child tax credit means you could get money back — as much as $1,400 — even if you don't owe any tax.
UPDATES for the 2021 Tax Year: The persistent COVID-19 pandemic prompted several new tax laws and payments directly to individuals who took serious economic hits as the country closed from March 2020 into the first half of 2021. In addition to three economic impact payments, the EITC (noted in #2 above) was enhanced for the 2021 tax year. So was the Child Tax Credit, including a way to get half the increased credit to eligible families as monthly payments from July through December 2021. But to get any of this coronavirus-related relief money, the IRS has to have your information in its system. Filing a tax return, even if you don't have to, is the best way to ensure you get all your relief payments and tax credits.
- You qualify for the American Opportunity tax credit. This educational tax break could give you a credit of up to $2,500 and portion of it — up to $1,000 — is refundable to some qualifying filers.
- You qualify for the Affordable Care Act's (ACA) premium tax credit. Yes, the tax penalty for not buying medical coverage is gone. But Obamacare, which how many folks still refer to the medical coverage they get through a marketplace, is still around. The Supreme Court said so, again, in June 2021. So is this tax break for folk who buy their health insurance coverage through a marketplace.
If you didn't get this credit in advance to help pay your policy premiums, you can get reimbursed for your premium payments by claiming this credit when, you got it, you file your return.
- To establish a placeholder for tax deductions and/or credits you need to carry forward. TurboTax points out, for example, that you can't claim a home office deduction so large that it would produce a loss.
Instead, you claim zero business income for the year and carry any leftover deduction into the next year when you expect to make more self-employment money. But in order to claim that extra write-off in future, better-paying years, you need to file for that initial claim.
- You got a Form 1099-B. Even if this tax document (or substitute statement) that details, per its title, Proceeds From Broker and Barter Exchange Transactions, doesn't report enough investment income to require you to file, you might want to do so anyway. IRS Publication 501 details on page 5 the reasons why, the most convincing of which is that "filing a return may keep you from getting a notice from the IRS."
- You made estimated tax payments. You want to make sure the IRS knows that you sent in these extra amounts for income that's not subject to withholding.
- You must file a state return. Most states collect some sort of income tax. And most of those 43 jurisdictions use their residents' federal tax filings as the basis for the state returns.
But your state may have some differences with Uncle Sam's tax laws when it comes to filing requirements. So if you have to file a state tax return, submitting a federal version could help you comply with your state tax responsibilities. Or even get you a state refund.
- To start the audit statute of limitations clock ticking. Yes, audit rates continue to drop. But no one wants to be in that small percentage of filers whose form get picked for an extra IRS examination, which is what the agency calls the process.
The IRS generally can go back three years to look at your old tax filings. However, that tax audit clock doesn't start ticking until you actually file a 1040. So even if you didn't make quite enough to trigger the filing requirement, you might want to make sure the IRS can't come back, say, five years from now to ask about why you didn't file in 2019.
If any of these potentially positive tax-filing circumstances apply to you, send in a federal 1040.
Yes, it will take some work. But, if your taxes are not complicated, software like that available from Free File can help.
And making sure your tax paperwork is filed and you get any refund you're due should more than make up for the effort.
You also might find these items of interest:
- 5 tax tips for Free File users
- 6 reasons to file your taxes early
- Claiming your COVID money as the Recovery Rebate Credit on your tax return