Do I Need a Tax Return?
A pretty simple question, which for most people, has a simple answer. Whether you need to file a tax return is normally determined by the amount of income that you earned in a particular year, but specific activities and items of income can create filing requirements even when you are below the filing threshold. The line-in-the-sand amount of income that gives rise to the need to file a tax return is called the filing threshold. The best resource for determining this amount for any tax year is Table 1 of IRS publication 501 (found here: https://www.irs.gov/publications/p501).
You’ll note that the ‘filing threshold’ is different for each ‘filing status’. Your filing status is closely tied to your marital status and your relationship to the other individuals living in your household.
Filing Statuses
If you and your spouse plan to file your taxes together, then you would file married filing jointly.
If you plan to each file a return, you would file married filing separately.
If your spouse died in one of the prior two years, then you file as a qualified widower (note that if your spouse died in the year you are currently filing, you can still file jointly).
If you are unmarried and you aren’t the primary support for other individuals living in your home, you file as Single.
If you are unmarried and you provide most of the financial support for individuals (most commonly children) then your filing status may be head of household (article coming soon detailing who does and who does not qualify from head of household).
Now that you understand how to determine your filing status, let’s have a look at the 2019 table 1 from Publication 501:
As you can see in the table, the last detail that modifies your filing threshold is whether or not you are age 65 or older. If you are 65 or older your filing threshold will be a little higher. You’ll also note from the table that married filing separately has a filing threshold of $5. This is not a typo, this is your filing threshold if you are married filing separately.
There are separate filing thresholds that apply to individuals who are claimed as dependents on someone else’s tax return. Dependents are generally children or relatives who live with you and who you financially support(article coming soon on who is and who is not a dependent).
Dependents have different filing thresholds based on their earned income and their unearned income. These thresholds also change based on your marital status and whether you are 65 or older and/or blind.
Unearned income filing threshold for unmarried dependents for 2019 if you are 1. Not blind or 65 and older ($1,100), 2. Blind OR 65 and older ($2,750), 3. Blind AND 65 or over ($4,400).
Earned income filing threshold for dependents for 2019 if you are 1. Not blind or 65 and older ($12,200), 2. Blind OR 65 and older ($13,850), 3. Blind AND 65 or over ($15,500).
Unearned income filing threshold for dependents that file jointly for 2019 if you are 1. Not blind or 65 and older ($1,100), 2. Blind OR 65 and older ($2,400), 3. Blind AND 65 or over ($3,700).
Earned income filing threshold for dependents for 2019 if you are 1. Not blind or 65 and older ($12,200), 2. Blind OR 65 and older ($13,850), 3. Blind AND 65 or over ($15,500).
These thresholds are updated annually, and you should check Table 2 of IRS publication 501 (found here: https://www.irs.gov/publications/p501) for up-to-date thresholds.
Other Taxes That Create Filing requirements (regardless of whether you are over the filing threshold)
There are a number of specific taxes that will create a filing requirement. The most common tax that will create a filing obligation is the Self-Employment Tax. If you have over $400 of net self-employment income, you are going to have to pay self-employment tax, and needing to pay self-employment tax means that you will need to file a return.
If you have taken the advance premium tax credit, a tax credit that is taken to reduce your monthly health insurance premiums for health insurance acquired through a Health Insurance Marketplace, you need to file to demonstrate that the tax credit was accurately taken.
If you received any HSA distributions that needs to be reported on Form 8889, you need to file a tax return.
If you have any additional taxes owed on retirement account distributions, i.e. early distributions from an IRA or 401(k) for which no exception applies.
You owe any Alternative Minimum Tax (“AMT”). AMT is a complicated topic and it’s likely that if you are in a position in which you are potentially going to owe AMT that you will be aware of that possibility. Note that only roughly .1% of households paid AMT in 2018. (article coming soon to provide more detail on the AMT).
If you have any recapture taxes, most commonly a result of selling a property that you have ‘depreciated’ for tax purposes, then you need to file a return.
Should I File a Tax Return
Should I file a tax return is a different question from do I need to file a tax return. There are a number of refundable tax credits that will likely motivate you to file a return even when you are not required to.
Tax credits like: the Earned Income Credit (“EIC”) which is a tax credit available to qualifying individuals who only have a small amount of earned income. The Additional Child Tax Credit which makes a portion of your child tax credit refundable. The Premium Tax Credit, a credit for individuals with health insurance through an exchange who don’t exceed certain income thresholds.
The most common reason to file a return when you aren’t required to, is to claim a refund of amounts that you have already paid to the IRS for that tax year. This applies to amounts directly withheld from income items, estimated payments you made, and to refunds from prior returns that you elected to carry over // apply to the current return. There is a limit to the amount of time you can wait to claim a refund owed to you by the IRS before it expires, so, if you’re expecting a refund, don’t wait.
International Corner
There are a number of international information reporting forms that need to be filed even if you do not have a 1040 filing obligation. There are also some circumstances where those international information reporting forms will give you a 1040 tax filing obligation.
Form 5471. If you have a Form 5471 filing obligation for your interest in a foreign corporation, you should file a 1040 to which you will attach your 5471. The IRS does not currently provide separate mailing instructions for Form 5471 for individuals that don’t need a 1040 AND being below the 1040 filing threshold does not relieve you of your Form 5471 obligations. Also, if you had Form 965 payments dating back to the transition tax from your 2017 return, you have a 1040 filing obligation.
Form 3520. If you have contributions, distributions, or ownership of a foreign trust or foreign retirement plan you may need Form 3520.This form is not filed with your tax return, it is separately filed to the IRS center in Ogden whether or not you have a 1040 filing obligation.
Form 3520-A. If you have an ownership interest in a foreign trust or foreign retirement plan, you may need Form 3520-A. This form (or the substitute 3520-A filed as an attachment to a 3520) is also filed directly with the IRS center in Ogden whether or not you have a 1040 obligation.
Form 8621. Even if you aren’t required to file a tax return because you are under the applicable thresholds, you are still required to file Form 8621 for your foreign mutual funds (or any other PFICs). Note that if you have excess distributions under 1291 (the default PFIC treatment) there will be write-in taxes that will give rise to a 1040 filing obligation. It’s worth mentioning that there is an informational filing exception for individuals with aggregate PFIC values under $25,000 (or $50,000 if filing jointly) but this exception does not apply to the income/tax resulting from PFIC transactions. If you need form 8621 and don’t need a 1040, you mail your Form 8621s to the IRS center in Ogden.
Form 8865. If you have a form 8865 filing obligation for your interest in a foreign partnership, you should file a 1040 to which you will attach your 8865. If you don’t have a Form 1040 filing obligation, you should still file your form 8865 at the same place and time that you would ordinarily file your 1040. It is likely to reduce processing errors if this 8865 is affixed to a 1040, even if you don’t have a 1040 filing obligation.
Form 8858. If you have a form 8858 filing obligation for your interest in a foreign disregarded entity or a foreign branch, much like Form 5471, you will affix this informational filing to a 1040. Being below the 1040 filing threshold does not relieve you of your 8858 filing obligation.
Form 8938. Unlike the above forms, if you aren’t required to file a tax return, you are relieved of your Form 8938 filing obligation. This relief is explicitly written into the Form 8938 regulations (1.6038D-2) “General rule. A specified person, including a specified individual who is a bona fide resident of a U.S. possession, is not required to file Form 8938 with respect to a taxable year if the specified person is not required to file an annual return with the Internal Revenue Service with respect to such taxable year.”