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Do I Need to File a Tax Return This Year? Common Misconceptions

Do I Need to File a Tax Return This Year? Common Misconceptions
Ines Zemelman, EA
28 April 2022

If you file tax returns year to year and never owe tax, you may be wondering - do I really need to file? Perhaps I can avoid filing to avoid the headache? Not owing tax does not mean filing was unnecessary. We will examine a few examples in the article below.
 

Retiree - net income of $12k, tax due 0. Did she have to file?

Anna, a retiree, had net income of $12K in 2020 and she did not owe tax. Upon quick glance at the minimum filing requirements, she may have come to the conclusion that she was not required to file in 2020 and does not have to file for 2021, either.

Anna would have been incorrect, having overlooked a key detail: gross income vs net income. 

Anna’s gross income was $16K from a private pension distribution. This income is above the filing threshold and failure to file would lead to owing tax & penalties. 

Anna worked with TFX and her CPA knew her prior filing history and carried over a net operating loss of $4K from the prior tax return. Her net income went down to $12K, she did not owe any money yet remained tax compliant.

What about prior years? In 2019, her gross income was only $10K. Was her tax filing redundant? No, it was not.

Anna was self-employed. For self-employed individuals, the filing threshold is $400 net income. Her business resulted in a loss. But, in order to calculate the loss and carry it forward, she had to file the return, reporting income and expenses, which resulted in the aforementioned loss. The net loss carryover came in handy the following year, where the net loss reduced her income, resulting in zero tax due. 

Other factors can contribute to filing requirements

There are multiple other factors making the filing mandatory. The table below shows various situations where tax filing is required, regardless of gross income.

By not filing, taxpayer may miss out on significant credits (see: refund)

It is a very common situation where by not filing the taxpayer misses various significant credits he/she could have received through filing the non-mandatory tax return.

  • Taxpayers with children qualifying for refundable child credits up to $3,600 per child. 

  • Earned income credit is another bonus paid by the government to low income families. 

  • Students or their parents with higher education expenses qualifying for American Opportunity Credit

There is one critical condition for receiving those credits: filing a tax return, even if not required otherwise.

Filing thresholds for minors or people claimed as dependent on others’ tax return are even more strict than for the adults. The IRS has a different income grid for those categories.

To summarize: prior to coming to the conclusion that you are exempt from federal tax reporting, consult TFX for assessment of your situation in depth and to receive accurate, professional advice.

Ines Zemelman, EA
Founder of TFX