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 their income is $12,400 or more in 2020. Why $12,400? Simple—that is the value of the standard deduction for a single taxpayer in 2020. In other words, that is the amount of money that a single filer would have deducted from their taxable income, anyway. So, if you did not reach the $12,400 threshold, you 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 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 recipients
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.
Instead, your standard deduction as a dependent in 2020 is either $1,100, or your earned income plus $350 — whichever is more. In the latter case, your deduction cannot be greater than the standard deduction for your status.
Reasons you might want to file
In some cases, even if you don’t meet the legal requirements to file a return, it could be in your best interest to file anyway. 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 they are not actually required to pay tax because their annual income does not surpass the threshold for single taxpayer standard deduction.
Most likely, this example individual will not be required by law to file a tax return. They 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 $12,400 threshold mentioned earlier. This is because of the self-employment tax. When you work for yourself, you are responsible for taxes that would otherwise be paid by an employer. These are taxes that 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.
The information in this article is up to date through tax year 2020 (taxes filed 2021).