This article is accurate for returns filed through tax year 2017. Under the Tax Cuts and Jobs Act, some of the laws mentioned changed beginning in 2018. Learn more about the updated tax laws enacted under the Tax Cuts and Jobs Act here.
It’s bittersweet to find out that you have to pay taxes. On the one hand, you must have earned at least a modest amount of money in order to owe taxes, and those earnings are cause for celebration. On the other hand, well… you have to pay taxes. That isn’t anyone’s idea of a good time.
Before you get too far down the road of preparing a tax return, it’s important to confirm that you actually need to file. It may be that you don’t have enough taxable income for the year, especially if you only work part-time. There are a few qualifications that you will need to meet in order to be required to file a return. Let’s take a look at some of the important details.
How Much Do You Have to Make to File Taxes?
The first place to start is your income. How much did you make during the tax year? If you didn’t make enough to meet the threshold for filing, you won’t be required to fill out a return.
So what is that magic number? If only it were that simple! Few things in the world of taxes are simple, and this is no exception. The amount of money that you need to make in order to be required to file a return is going to depend on a number of factors—specifically, age and filing status.
As an example, somebody under the age of 65 filing as a single taxpayer will only be required to file if his or her income is $10,400 or more. Why $10,400? Simple—that is the value of the standard deduction for a single taxpayer (including one exemption) in 2017. In other words, that is the amount of money that a single filer would have deducted from his or her income anyway. So, if that individual did not reach the $10,400 threshold, he or she would effectively have no taxable income, and there would be no reason to file.
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 2017, the base tax rate is 10% if you earn $9,325 or less. For those earning between $9,325 and $37,950, the tax rate moves up to 15%. Tax rates increase gradually, topping out at 39.6%. This tax rate affects a relatively few number of taxpayers overall, as you need to earn at least $418,400 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 exemption because that exemption 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 $6,350. So if you are claimed as a dependent and you earn more than $6,350, you will likely be required to file your own return.
You Might Want to File
It is important to note that there is a difference between a legal requirement to file and a desire to do so because it would be in your best interest. For a moment, let’s imagine an individual who earns $5,000 during the tax year. Most likely, a portion of that will be withheld for federal tax. That means the individual will have paid tax during the year, but he or she is not actually required to pay tax because his or her annual income does not surpass the threshold for single taxpayer standard deduction plus one exemption.
Most likely, this example individual will not be required by law to file a tax return. He or she will want to file, however, as the money that was paid during the course of the year will come back in the form of a refund.
Don’t make the mistake of thinking that you should resist filing a federal tax return unless you are required to do so. Always take a look at your tax situation, even if you only have minimal earnings for the year, and determine whether or not it would be beneficial to file.
Specific Rules for Self-Employment
There is a growing number of taxpayers earning money through self-employment as more and more types of work become available online. Millions of people now earn at least a portion of their income from the comfort of their own home. If you perform some kind of work in a self-employment setting, you will need to conform to the tax rules that govern such work.
If you do work as a self-employed individual, you may need to file a tax return even if you earn nowhere near the $10,400 threshold mentioned earlier. This is because of the so-called self-employment tax. When you work for yourself, you are responsible for taxes that would otherwise be paid by an employer. These are taxes which go toward Social Security and Medicare. As long as you had net earnings of $400 or more, you will need to report those earnings and pay the associated self-employment tax.
In addition, it’s important to understand self-employed tax brackets if you are working for yourself. The freedom that comes with being self-employed is a wonderful thing, but you’ll also have more responsibilities with regard to the operation of your venture. Any self-employed individual in need of assistance should contact a tax professional.
We’ve learned that the original question—”Do I make enough to pay taxes?”—is actually best approached in two parts. First, are you legally required to file a tax return based on your income? And, if not, would it be in your best interest to do so anyway?
Review all of the relevant information with regard to your tax situation and make the decision that is in your best interest. Of course, if it turns out that you’re required to file by law, the decision in your best interest is obvious—file your return!