How Health Care Reform Will Affect Tax Preparation

What is the most money you can make and not have to file taxes?

Whether you need to file tax returns depends on your earnings, your age and your filing status. In many cases, even if you meet regulations eliminating the need to file a tax return, you may want to if you qualify for tax credits that could generate a rebate. Always check the IRS website to learn prevailing rules for the year in which you must or should file or are exempt from filing a federal tax return. The maximum earnings reported are as of 2012, and these numbers are subject to change annually.

Single Taxpayers

If you are single and under age 65, you can earn up to $9,499 in a year and not file a tax return. Should you be 65 or older, you could earn up to $10,949 and be exempt from filing a federal tax return. However, you may qualify for an Earned Income Tax Credit, which is refundable in cash to you. Also, if you’ve had income taxes withheld, you should file to receive a refund of your money.

Married Taxpayers Filing Jointly

If both married taxpayers are under 65, they can earn up to $18,999 and not need to file a return. Should one of the spouses have celebrated a 65th birthday, both could earn up to $20,149 without filing a tax return. If both spouses are 65 or beyond, they can earn up to $21,299 and not file a federal return. However, if one or both of you worked and had taxes withheld, you’ll probably want to file to get a refund since you’ll have no tax liability.

Married Taxpayers Who File Separately

If you’re married and file separately, only up to $3,699 of earnings will permit you to not file a tax return. This rule applies regardless of your ages. Even if one spouse dies during the tax year, if the partners were not living together, each spouse, or the estate thereof, must file a return if they jointly earned $3,700 or more during the year.

Head of Household Filers

Those filing as head of household and under age 65 can earn up to $12,199 per year and be exempt from filing a tax return. Should the head of household be 65 or older, the taxpayer could earn up to $16, 499 without filing taxes. Once again, should the taxpayer have tax withholdings during the year, the head of household should file to qualify for and receive a refund.

Widows and Widowers with a Dependent Child

A widow or widower with a minor or adult dependent child can earn up to $15,299 if they are under 65. Should the widow or widower be 65 or older, the taxpayer could earn up to $16,449 without tax filing requirements. However, these taxpayers may also qualify for both the Earned Income Credit and the Additional Child Tax Credit, both of which generate refundable funds greater than any withholding tax balances, giving these taxpayers refund checks beyond any of their earnings withheld by employers.

Even if you don’t have to, you may still want to file if…

Say your 2018 gross income was low enough that you’re not required to file Form 1040 for last year. Great, but it may be a good idea to file anyway. Here’s why.

You may be due a federal income tax refund for 2018, for example, because of the refundable earned-income tax credit or the refundable child tax credit. No 2018 return means no refund.

Until your 2018 return is filed, the three-year statute of limitations period for the commencement of an IRS audit won’t start. So the IRS could decide to audit your 2018 tax situation five years (or more) from now, and hit you with a tax bill plus interest and penalties. In contrast, if you file a 2018 return showing zero federal income tax liability, the IRS generally must begin any audit of your 2018 tax year within three years of the filing date.

If you had an overall capital loss for 2018 caused by investment losses, you can carry that loss forward to future tax years and offset otherwise taxable capital gains in those years. However, you must file a 2018 return to establish that you incurred a tax-saving capital loss carry-over last year.

If you had an overall net operating loss (NOL) for 2018 caused by business losses, you can carry the NOL forward to future tax years and offset otherwise taxable income earned in those years. However, you must file a 2018 return to establish that you generated a tax-saving NOL last year.

Back up. What exactly is gross income?

It’s all the money you’ve made in the tax year. For most people, that mainly includes earned income from your salary, wages, tips or bonuses. It also includes unearned income, like dividends and accrued interest, as well as any gambling winnings. It does not include tax-exempt income, such as child support payments, most alimony payments, workers’ comp, and more.

Gross income should not be confused with your adjusted gross income (AGI) or your taxable income. You can determine your AGI by taking your gross income and subtracting certain deductions, including contributions to a traditional IRA, 401(k) and other qualified retirement plans, interest paid on student loans and contributions to a health savings account. Taxable income is your AGI minus your standard deduction or any itemized deductions you claim. (You cannot claim both the standard and itemized deductions. Post-tax reform, most people are better off taking the standard deduction, which for the 2019 filing year goes up to $12,200 for single filers and $24,400 for joint filers.)

So if my gross income falls below those minimums, I don’t have to file a tax return? Correct. But it might be a good idea to file anyway. That’s because you may qualify for certain tax credits and get a little extra cash from Uncle Sam, even if you owe nothing.

How a negative tax bill could turn into a refund

Consider this example of a woman who doesn’t owe federal income tax and will likely end up with a refund:

Amy is a single mother who, by the end of 2019, will have earned $20,000. The standard deduction of $18,350 for single parents reduces her taxable income to $1,650, which places her in the 10% tax bracket ($0 to $9,525). Her tax bill comes out to $165.

If she qualifies for the earned income tax credit (EITC), a subsidy for low-income working families, she can reduce her tax bill by up to $3,526, the maximum for a family with one child in the 2019 tax year. She may also claim the child tax credit (CTC), which allows her to apply a credit of up to $2,000 to her tax bill.

Amy will end up with a negative final tax bill, and since EITC and CTC are refundable, she’ll receive the credits as cash.

But while Americans who earn too little don’t pay income taxes, those who hold a job are still subject to payroll taxes, which support Social Security, Medicare, and unemployment insurance. According to Tax Policy Center data, 26.7 million Americans owed neither income nor payroll taxes for the 2018 tax year. However, some taxes are certain for everyone, regardless of income, including sales taxes, excise taxes, and property taxes.

Understanding Tax Brackets

The amount of tax you owe in a given year is based on your earnings for that year. That might seem like an obvious point, but many people are unaware of how the household income tax brackets work. Not only do you owe more gross taxes as you earn more, but you are also paying a higher percentage of your earnings.

For 2020, the base tax rate for individuals is 10% if you earn $9,875 or less. For those earning between $9,875 and $40,125, the tax rate moves up to 12%. Tax rates increase gradually, topping out at 37%. This tax rate affects a relatively few number of taxpayers overall, as you need to earn at least $518,400 annually to break into this top tax bracket.

Social Security Issues

For those over 65, Social Security payments are going to come into play when determining whether it will be necessary to file. In general terms, those receiving Social Security are treated like anyone else who earns income during the tax year. Where it can get complicated is when you have to consider Social Security income in addition to other income sources.

To make sure you actually need to file a return, read the rules carefully with regard to Social Security payments. If you have any questions, consult a tax professional who will be able to offer you some guidance.

Filing as a Dependent

If you are being claimed as a dependent on another tax return, the requirements for filing your own return will change. As a dependent, you can’t claim your own standard deduction because that is used by the individual (or couple) claiming you as a dependent.

As a result, you are only left with the threshold of the standard deduction, which is $12,400. So if you are claimed as a dependent and you earn more than $12,400, you will likely be required to file your own return.