Don't Mess With Taxes

Photo by Polina Zimmerman

While millions are debating when to file their tax return, others are asking a more elemental question. Do I have to file a 1040 at all?

It's a good question. The short answer is probably. But there are some situations where the Internal Revenue Service doesn't demand individuals file.

Here's a look at just who is off the tax filing hook.

Filing requirements for most of us: Generally, if you are a U.S. citizen or resident you must consider three things when determining whether you have to file a tax return: your age, your filing status, and your income.

The table below shows how these three factors work together, specifically as to whether you need to send the IRS a Form 1040 this year to account for your 2021 income.

Now for a few notes on the table's entries.

Age matters: Getting older also has a benefit when it comes to whether you have to file. As the table indicates, older individuals get to earn more money before the IRS requires a return.

And the IRS tweaks that age a bit to the advantage of older New Year's Day babies. If you were born on Jan. 1, 1958, you are considered to be age 65 at the end of 2022.

That one-day shift lets you, as a de facto senior citizen, make a little more money before you have to mess with tax filing.

And in most cases, you can't be too young to file if you make enough money. Tax law, however, does take into account other factors in figuring the filing threshold amounts when someone is a tax dependent (more on this in a couple of paragraphs).

Type of earnings to count: Now about the income that triggers the need to file a 1040.

Yes, that $5 amount for married filing separately spouses is correct. If you're married and you and your husband or wife file separate returns, then all it takes is earning five bucks to require filing. This is one of the instances where the tax code encourages couples to stay together.

As for the larger income levels, the IRS looks at your gross, or total income before deductions and adjustments. So the amounts in the table's third column are all that you received during the tax year from all sources.

That includes the main payment method for most of us, money. But you also must take into account goods, property, and services that aren't exempt from tax.

That includes earnings from gig work, which gained in popularity during the COVID pandemic, as well as earnings when you shifted from full-time employees to full-time entrepreneur when you joined the Great.

Don't forget about any capital gains if, despite market turmoil, you cashed out during an opportune time or got distributions from mutual funds you kept in your portfolio. And if you lived in a housing market where prices skyrocketed and you were able to sell before prices dropped, note that any profit in excess of the residential sale tax exclusion amount ($250,000 for single owners, double that for jointly filing married home sellers) counts.

However, you don't have to include any Social Security benefits unless —

• you are married filing a separate return and you lived with your spouse at any time during 2022, or
• one-half of your Social Security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly).

In these cases, you'll have some more calculations to do. Or your tax software or tax preparer will have more work to do.

Dependent filer considerations: There also are filing matters to consider if you're a dependent for tax purposes.

If your parent (or someone else) can claim you as a dependent, the IRS created the chart below, published in the Form 1040 instructions, to help you figure out whether you must file a return.

The unearned income referred to in the chart includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable Social Security benefits, pensions, annuities, and distributions of unearned income from a trust.

Earned income includes salaries, wages, gratuities, professional fees, and taxable scholarship and fellowship grants.

Gross income is the total of your unearned and earned income.

Vision factors make a dependent's difference: In addition to age and income, in the case of determining whether a tax dependent must file that potential filer's visual acuity is taken into account.

The IRS refers to it as being blind, but technically you don't have to be totally sightless. Your poor eyesight counts if at the end of the tax year your eye doctor issues a statement that you can't see better than 20/200 in your better eye with glasses or contact lenses, or your field of vision is 20 degrees or less.

Your ophthalmologist's or optometrist's statement also must certify that your eye condition isn't likely to improve beyond either of those conditions. You don't have to file the statement, but do keep it for your records in case the IRS questions why you didn't file.

Yeah, not surprisingly, calculating your filing responsibility as a dependent can be a bit (OK, a lot) confusing. Your tax software or tax preparer should be able to help clear up your situation.

Other filing factors: Such complications are one of the biggest complaints about taxes, a very close second to the perennial grousing about the actual dollars we pay.

This is obvious in the above rules about how income and filing status determine whether you must file a 1040.

But wait. There's more!

Other factors that, well, factor into the filing or not decision include —

• You made, after expenses, at least $400 from self-employment. This is an area where folks with side hustles need to pay close attention. While you might not technically have made enough to require filing a tax return, you still have to file in order to pay the self-employment (SE) tax on these independent earnings. The tax due here, calculated on Schedule SE, is the self-employed person's version of the payroll taxes that go toward Social Security and Medicare, aka FICA, that are taken out of salaried workers' checks. Again, it bears repeating. It's possible you could owe SE taxes, but no income tax. However, you still must file to report those independent earnings.
• Your job includes gratuities, but you didn't report all your tips to your employer. You now need to do that by filing a return and also paying the SE tax on those tips. The same SE filing is required if you got a paycheck, but your employer didn't withhold these FICA taxes.
• You owe the Alternative Minimum Tax (AMT). This parallel tax, created in the 1960s to ensure that rich taxpayers paid at least some (aka minimum) amount of tax, used to snare a lot of middle-income filers because it wasn't indexed for inflation. That changed in 2013, with the annual exemption amounts now reducing the number of folks caught in this tax net. The TCJA went even further, increasing AMT phaseout threshold amounts to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers. If, however, you make enough that you have to pay the AMT, then you must file. A check of the most recent AMT income exclusion inflation adjustments will give you an idea of whether you'll be affected by the AMT.
• You or your spouse or dependents got advance payments of the premium tax credit to help cover Affordable Care Act (ACA) medical coverage purchased through the healthcare Marketplace. Yes, the ACA, or Obamacare as it's still popularly known, is still around. So is the tax break to help you get coverage. But you must file to reconcile the health care credit amount you got upfront to buy your policy.
• You have household help and pay your employees enough to trigger employment taxes. I know, if you can hire help, you probably made enough to have to file a return anyway. But just in case, the IRS says that if in the 2019 tax year you paid $2,100 or more to hired help in or around the house, you must file a Schedule H with your Form 1040.

Photo by Alex Green

Although this requirement is popularly called the nanny tax, it covers not just childcare assistance, but also maids, housekeepers, gardeners and others who provide services as your employee for the upkeep of your private residence. Note the employee characterization. This doesn't apply to independent contractors who do household work for you, such as the housekeeper who comes in once a week or the monthly lawn service crew. But be careful here. The IRS looks closely at worker designations. The good news, though, is that if you are filing a tax return only because you owe this tax, you can file Schedule H by itself, without having to hassle with the 1040.

You can find more about filing requirements in the Form 1040 instructions, as well as IRS Publications 501, which discusses (in part) filing, and 17, the IRS' general tax guide.

Don't want to decipher tax-speak? No problem. You also can use the IRS' online tool to determine whether you need to file a return this year.

You also might find these items of interest:

• 7 reasons to file your tax return early
• 6 reasons why you should wait to file your tax return
• 5 tax considerations for young workers and their parents
• Answers to these filing checklist questions could make a big tax difference

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