Do You Need to File a Tax Return?

Filing taxes isn’t enjoyable for most people. And while there are a few scenarios that allow you to skip filing a return, it’s usually a good idea to file even if you don’t have to. Almost everyone who earned income will either have a tax liability or be due a tax return.

Also, filing a return will make you eligible to receive any government benefits you may qualify for.

You should file by the April 15 federal tax deadline to avoid penalties if you owe the IRS money – or to get your tax refund sooner.

Table of Contents
  1. When a Tax Return is Optional
  2. When Do I Need to File a Tax Return?
    1. If You are Owed a Tax Refund
    2. Want to Receive a Stimulus Check
    3. Earn More than the Standard Deduction
    4. Earn Self-Employment Income
    5. Earn Unemployment Benefits
    6. Earn Taxable Retirement Income
    7. Qualify for Tax Credits
    8. You Receive a Health Coverage Tax Credit
    9. Sell Investments
    10. Want to Qualify for a Loan
    11. Owe Special Taxes
  3. Summary

When a Tax Return is Optional

There are a few instances when you don’t have to file a tax return.

Some examples include:

  • Earn less than the standard deduction (and are not owed a refund, or don’t care to receive your refund)
  • Didn’t earn self-employment income
  • Don’t owe a tax liability
  • Only earn non-taxable Social Security benefits
  • A child dependent has unearned income below $1,100 (and is not owed a refund)

It’s nice not having to file your taxes which can be as enjoyable as getting a cavity filled. However, it can still be worth your time if you can get a tax refund.

You may also qualify for additional tax credits that you can only receive if you file. Here’s how to file your taxes for free.

When Do I Need to File a Tax Return?

Most working Americans will need to file a tax return to receive government benefits and accurately report taxable income. Here the situations that require filing taxes.

If You are Owed a Tax Refund

Any person eligible to receive a tax refund needs to file a tax return, even if you’re not legally required to file. The IRS and your state tax agencies aren’t going to give you a refund unless you ask for it.

For example, the teenager working part-time should file a return to get their federal withdrawal amount back. Teens and adults won’t get their FICA or Medicare payroll tax withholdings back.

Preparing your taxes calculates your refund amount. You can check your tax refund status after the IRS accepts your tax return.

Want to Receive a Stimulus Check

Non-filers had a difficult time receiving the CARES Act stimulus check in the spring of 2020. They had to file a basic tax return to receive the stimulus payments so the Treasury Department could deposit the correct dollar amount.

People who didn’t receive a stimulus payment during 2020, will need to file a tax return to receive the recovery rebate as a tax credit along with any tax refund.

The 2020 stimulus payment amounts come from the 2019 tax year data for most filers. If you added a dependent or had a reduced income in 2020, filing an updated tax return can help you get the correct payment upfront for future stimulus payments.

Earn More than the Standard Deduction

Even if you don’t owe a tax liability and will receive a tax refund, you will need to file your taxes if you earn more than the standard deduction.

Below are the standard deduction amounts for your 2020 taxes that you file in 2021:

  • Single: $12,400
  • Married, filing jointly: $24,800
  • Married, filing separately: $12,400
  • Head of household: $18,650

It’s nearly impossible to pay the exact amount of taxes you owe during the year. If you earned more than the standard deduction, you should file a return to make sure you don’t have a tax liability or deserve a refund.

Filing by the April 15 federal tax deadline ensures you don’t pay any penalties or interest if you owe money.

Procrastinators have up to three years to file a return and receive a refund penalty-free.

If you owe the IRS money, you must file and pay your taxes by the federal tax deadline. The tax penalty is 5% of the unpaid tax bill each month with a maximum 25% penalty.

Earn Self-Employment Income

Freelancers and the self-employed that earn income reported on a Form 1099 instead of a W-2 form must file their taxes. Unreported taxable self-employment income of at least $400 is necessary too.

You can report any estimated tax payments and work-related deductions to reduce your remaining tax liability.

Filing also calculates your future Social Security benefits.

Earn Unemployment Benefits

Unemployment benefits are subject to income taxes. State and federal benefits report on IRS Form 1099-G. If income tax isn’t withheld upfront, it may be due at tax time.

Earn Taxable Retirement Income

Traditional IRA and 401(k) distributions grow tax-deferred and the tax bill comes due in retirement.

Reporting your retirement plan distributions also ensures you comply with your minimum required minimum distributions (RMDs) for the tax year.

It’s important to note that one overlooked CARES Act benefit is that RMDs are waived for 2020.

Social Security benefits can also be taxable. This is more likely the case for beneficiaries under age 65 as the standard deduction is lower.

Individuals receiving at least $25,000 ($32,000 for joint filers) may need to pay taxes on benefits. Using online tax software can be the easiest way to determine if your benefits are taxable.

Qualify for Tax Credits

Tax credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit require a tax return to calculate the credit amount.

You can also claim tax deductions to reduce your taxable income.

You Receive a Health Coverage Tax Credit

If you buy health insurance from Healthcare.gov Marketplace or a state exchange you will receive an end-of-year tax document (IRS Form 1095-A).

Form 1095-A reports your coverage details and any advance payment of the premium tax credit. You will need to report this information to make sure the annual credit matches your taxable income.

The IRS may increase your refund amount if you’re entitled to a larger credit. You may also have to repay a partial credit if your actual income is higher than your estimated income.

Sell Investments

Any stock investment or cryptocurrency sale is a taxable event. Your online broker will provide a Form 1099-B to report the transaction plus any dividend income subject to taxation.

Want to Qualify for a Loan

Banks may request your most recent tax returns to verify your income when applying for a new mortgage, mortgage refinance or a personal loan.

Parents must also file a tax return to help their college students complete the FAFSA to receive student financial aid.

Owe Special Taxes

Less-common taxes can be due depending on your tax situation:

  • Alternative minimum tax
  • Recapture taxes
  • Taxes on household employees
  • Social Security and Medicare tax on unreported tips
  • Received distributions from a health savings account or similar medical savings accounts

Summary

It’s best for most people who earn taxable income to file their taxes. If you withhold taxes during the year, filing lets you see if you qualify for a tax refund or tax credits. You also have peace of mind knowing you don’t owe the IRS money.

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Josh Patoka

About Josh Patoka

After graduating in $50k with student loans in May 2008 from Virginia Military Institute with a B.A. International Studies and Political Science with a minor in Spanish (I studied abroad in Sevilla, Spain for 3 months), Josh decided to sell his soul for seven years by working in the transportation industry to get out of debt ASAP and focus on doing something else with a better work-life balance.

He is a father of three and has been writing about (almost) everything personal finance since 2015. You can also find him at his own blog Money Buffalo where he shares his personal experience of becoming debt-free (twice) and taking a 50%+ pay cut when he changed careers.

Today, Josh relishes the flexibility of being self-employed and debt-free and encourages others to pursue their dreams. Josh enjoys spending his free time reading books and spending time with his wife and three children.

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