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Understanding the requirements of filing a tax return will help you stay compliant with the IRS. In some cases, you may not be required to file. This article aims to provide you with clear, concise information to help you determine your obligations.
Who is required to file a tax return?
In general, if your income exceeds a certain threshold you’re required to file a tax return. The income threshold depends on factors such as your: age, marital status, health, dependency status, and others.
Income thresholds for filing a tax return
Use this chart to determine whether you need to file a tax return in 2024 for tax year 2023.
The thresholds represent your standard deduction. The standard deduction is the amount that all taxpayers in your filing category are allowed to subtract from their taxable income. Taxable income includes losses so it isn’t the same as gross income. You’re required to file a tax return if your income without subtracting losses is greater than your standard deduction.
What’s your filing status?
Your filing status is determined by your marital status and whether you have dependents. Dependents are either your children or another qualifying relative for whom you maintain a household.
Most unmarried individuals will file as Single. Married couples will generally file jointly. Married couples who live apart may file separately. Unmarried individuals who have dependents may qualify to file as Head of Household or Qualifying Surviving Spouse (assuming their spouse has passed away).
As you can see in the table above, your filing status determines the amount of your standard deduction. Filing status also determines your eligibility for various deductions and credits.
The best way to determine your filing status, if you’re unsure, is to take the IRS’ interactive quiz.
What is gross income?
Gross income means all income you received in the form of money, goods, property, and services that isn’t exempt from tax.
- Income from sources outside the United States is included in gross income.
- Proceeds from the sale of your main home is also gross income.
- A portion or all of your Social security benefits may be excluded from gross income.
- Losses from sales of property, stocks, or other investments aren’t deducted from gross income. Gains are included in gross income.
- Business losses aren’t included in gross income. However, business profit is included.
What are the filing requirements for self-employed individuals?
Self-employed individuals include business owners who operate through an unincorporated sole proprietorship or single-member LLC. These individuals report their business income on Schedule C of their personal income tax return.
Business owners must file a tax return if their self-employment income was greater than $400–even if their total income was less than the standard deduction.
As an example, let’s say Greg is retired and earned $1,000 selling garden vegetables from a roadside stand last year. His other income includes $16,000 in nontaxable Social Security benefits and $24,000 from a 401(k) account. As a married person filing jointly, his standard deduction will be $29,200.
Greg is exempt from income tax because his gross income from selling vegetables and taking 401(k) distributions is less than his standard deduction ($25,000 < $29,200). The Social Security income is tax-free and excluded from the calculation. Even so, he must file a tax return because his vegetable stand earned more than $400.
Self-employment tax
The special filing requirement for self-employed taxpayers exists because self-employment income is subject to an additional tax: self-employment tax. Self-employment tax is their contribution to the Social Security & Medicare systems.
Workers and their employers are required to collect Social Security & Medicare taxes through payroll (refer to the “FICA” line on your pay stub). By law, sole proprietors don’t run payroll for themselves and therefore don’t pay into the systems through payroll taxes. Instead, they contribute by paying self-employment tax on their personal tax return. This tax allows them to accumulate contribution credits and receive a monthly Social Security benefit when they retire.
Self-employment tax is equal to 15.3% of business income. A taxpayer can deduct 50% of their self-employment tax from their taxable income (i.e. their “employer” portion).
In Greg’s situation, his self-employment tax will be $141 ($1,000 x 15.3% x 92.35%). He can deduct 50% of his self-employment tax on Schedule 1 of his tax return. His income taxes will be $0 since his gross income is less than the standard deduction.
It’s generally advisable for self-employed taxpayers to make quarterly estimated tax payments throughout the year since they aren’t having taxes withheld from their income. Doing so will prevent penalties, interest, and a large tax bill from accumulating.
Filing requirements for other business types
Not all business owners are sole proprietorships or operate through single-member LLCs. Some may incorporate their business. They may also have a business partner with whom they split profits. Both types are separate tax entities and must file a separate income tax return.
To comply with filing requirements, business owners should confirm the tax status of their business and file the appropriate tax return. Each entity type has unique filing requirements so it’s important to inform yourself to stay compliant.
What are the filing requirements for dependents?
A taxpayer’s dependents may also need to file a tax return. A dependent is a child or other relative who’s financially supported by someone else. The IRS provides an interactive quiz for determining who qualifies as your dependent.
In addition to gross income, the filing requirements for dependents include thresholds for “earned” and “unearned” income. Earned income includes salaries, wages, tips, professional fees and taxable scholarships and grants. Unearned income includes taxable interest, dividends, unemployment, Social Security, retirement income, and other types of passive income.
For 2023, a dependent child must file a tax return if any of these statements are true for the dependent:
- Unearned income was greater than $1,150
- Earned income was greater than $12,950
- Gross income was greater than the larger of: (a) $1,150 or (b) earned income plus $400
The thresholds above apply to dependents who are younger than 65, not blind, and unmarried. Refer to Chart B in the Form 1040 instructions for the filing requirements of dependents not meeting these criteria.
Reporting a child’s income on their parent’s tax return
As a parent, you can choose to report your child’s income on your tax return. Your child must be under age 19 or be a full-time student under age 24. You’d report your child’s income on Form 8814 and file it with your tax return. Reporting your child’s income on your tax return is beneficial in cases where your child is required to file a tax return as it simplifies the tax filing process.
When are tax returns due?
Individuals must file a tax return on or before April 15th, 2024.
Filing an extension
If, for whatever reason, you aren’t able to file a tax return before the due date you can file for an extension. Filing for an extension will provide you with an additional six months to file your tax return. Once extended, the due date for your tax return is October 15th, 2024.
You must file for the extension on or before the original due date of the tax return (see above).
Filing for an extension does n’t provide additional time for paying taxes owed. Tax payments are still due on April 15th, 2024. Filing an extension without making a tax payment may cause you to incur late payment penalties on the unpaid balance. In addition to penalties, interest accrues for each month that the balance remains unpaid.
Of course, it can be difficult to know what your tax liability will be without having first filed a tax return. A good rule of thumb is to calculate your total income, subtract the standard deduction and calculate your estimated tax based on that.
Reasons to file a tax return when not required
In some cases, it may be beneficial to file a tax return even though you’re not required to file one.
Claim a tax refund
If you’re employed, you might have had too much tax withheld from your paycheck. You can get a refund of excess tax withholdings by filing a tax return.
Claim tax credits
You can file a return to claim tax credits even though your income is below the filing limit.
- Earned income credit
- Additional child tax credit
- American opportunity credit
- Credit for federal tax on fuels
- Premium tax credit
- Credits for sick and family leave
Accumulate Social Security Benefits
If you’re self-employed, the income reported on your tax return is used to calculate your Social Security benefits. Unreported income may cause you to receive less benefits in retirement.
Improve creditworthiness
By reporting all your income, you provide lenders a complete and accurate picture of your finances, potentially increasing your loan amount and decreasing your interest rate.
Apply for student aid
If you have dependents, they may need to provide tax account information from your tax return when applying for financial aid.
Filing a tax return when required
If you meet the filing requirements, your next step is to begin the filing process by gathering your documents, preparing your tax return, and settling up with the IRS or state tax authority by paying the taxes owed or receiving a refund for overpayments.
The exact steps in the filing process will look different for each taxpayer considering that everyone’s tax situation is unique. However, these are the basic steps that all tax filers will follow.
Gathering your tax documents & information
The first step in the filing process is to retrieve tax documents from your accounts, employers, and other sources.
Unless you have a tax background, it’s difficult to know what is relevant for taxes and what isn’t. Here’s a simple chart to help you identify common forms and documents that you should include in your tax return.
Common Tax Forms
Not all tax information will be reported on a standard form. In addition to these tax forms, you’ll need to find other information before filing your tax return. This information includes, but isn’t limited to:
Information Not Reported on a Tax Form
Preparing your tax return
If you’re comfortable with a DIY solution, software such as FreeTaxUSA, TurboTax, and H&R Block are all reliable options for filing your tax return. The cost of these software ranges from free to hundreds of dollars depending on the complexity of your tax situation. Having rental properties, running a business, or filing in multiple states will increase the cost of filing your tax returns.
In addition to paid software, the IRS offers two free filing options. The first program includes guided tax preparation for taxpayers who earn less than a certain amount. The second is available to taxpayers of all income levels but, unlike the first program, it doesn’t include a guided workflow.
You can also file the old-fashioned way by completing your returns by hand and mailing them in. This isn’t recommended because it’s prone to processing delays and errors.
Paying taxes or receiving a refund
After filing a tax return, you’ll either make a tax payment or receive a refund for taxes overpaid.
You’d make a tax payment if the taxes you owe (called your “tax liability”) are greater than the taxes you paid through withholding at your employer or estimated tax payments you made during the previous year.
You’d receive a refund if you had too much tax withheld from your paycheck or paid too much in estimated tax payments.
Hiring a professional to file your tax return
As a taxpayer, you should familiarize yourself with the basics of your tax situation. Knowing the basics will help you avoid common missteps in the filing process and take control of your personal finances.
However, taxes are complicated. There’s a lot to know before becoming an expert. Unless you enjoy learning about taxes in detail, it’s probably not worth your time to research the various laws, regulations, court rulings, and other rules governing your specific filing situation. Your time would be better spent elsewhere.
If that describes you, consider hiring a professional to prepare your tax returns. An experienced tax professional will use their wealth of knowledge and experience to prepare complete and accurate tax returns. You’ll gain peace of mind knowing that your returns were filed correctly.
Credentialed tax professionals include Certified Public Accountants (CPAs) specializing in tax and Enrolled Agents (EA). Some states also have their own licensing process for tax preparation services.
A tax professional will walk you through the filing process from start to finish. They’ll provide an organizer to help you provide the right tax information and documents. The professional will then use what you’ve provided to prepare a tax return with all of the necessary forms and schedules. You’ll sign and review the return before it gets filed.
After your tax return is filed, a professional specializing in tax advisory services can help you be proactive about next year’s taxes. These services include projecting your tax liabilities and identifying relevant tax strategies that will better position you for the current tax year or future years.
Reach out through the contact form below if you’d like to outsource your tax return filing to a professional.
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