Who needs to file? Who knows? Who cares?
The IRS is really running behind this year, thanks to epic procrastination by Congress. In fact, the IRS has yet to issue explicit official guidance to taxpayers to inform them about the minimum amount of income that triggers filing requirements for 2012.
I do not know if or when the IRS plans to issue new Pub 4012 reference books for the new filing season. They may well not arrive in time to be fully understood and digested by new volunteers before we begin assisting taxpayers in late January, so I am updating and annotating the old Pub 4012 (issued in November 2011) as best I can. Here is a link to my annotated and marked-up version of Tab A: Who must file? Comments are welcome.
Who needs to file? Who knows?Here is my best guess, based on guidance that the IRS issued over a year ago to folks who needed to figure out withholding and estimated tax payments during 2012. Analysis from the Tax Policy Center also supports these figures:
In general (unless special circumstances apply--see below), the following taxpayers will NOT be subject to a legal filing requirement:
- Single taxpayers with 2012 incomes below $9,750
- Married taxpayers with 2012 incomes below $19,500
- Head of Household taxpayers with 2012 incomes below $12,500
However, special circumstance CAN and DO apply to many taxpayers. The applicable income limits can be higher or lower--even zero in some cases, so it is foolhardy to rely on the figures above without digging deeper.
On the one hand, many taxpayers can have income levels much higher than those above without being subject to a filing requirement. For example, taxpayers whose income comes entirely (or almost entirely) from Social Security benefits may not have a filing requirement, even if their income is much higher than the amounts listed above. In addition, taxpayers who are legally blind and/or over 65 have higher thresholds before they are require to file tax returns. (Why just the blind and not those with other disabilities, some of which might arguably require far more expense to mitigate? Who knows? Apparently it historically had something to do with the relative strength of the lobbying efforts of their advocacy organizations.)
In many other cases, however, taxpayers can be required to file at much lower levels than above dollar figures might suggest. Some examples:
- Taxpayers with self-employment income can be required to file a tax return once their self-employment income reaches $400.
- Taxpayers who can be claimed as a dependent by another taxpayer can be required to file a tax return if they have "investment income" over $950 and are subject to the "kiddie tax". Note that the IRS deems "investment income" for this purpose to be anything other than wages and self-employment income, so investment income subject to kiddie tax could conceivably include prizes your child won or those on-line poker winnings. Even taxpayers who *can't* be claimed as a dependent (e.g., self-supporting independent full-time students under 24 in some cases) may still be subject to the kiddie tax in some cases if a substantial part of their support comes from sources other than earned income. Dependents with *earned income* as low as $5,950 can also expect to be subject to a filing requirement.
- If you are a taxpayer whose employer did not withhold and remit the correct amount of Social Security payroll tax on your wages for whatever reason (e.g., tax evasion by your employer or perhaps your employer is an international organization legally not required to withhold such taxes such as the International Monetary Fund (IMF) or the World Bank, even though you owe them) you can be required to file a tax return even if your income is very low because you still need to report and pay your payroll taxes.
- There is a laundry list of other obscure miscellaneous situations when you may need to file a return with the IRS even if your income fell below the usual thresholds. A number of additional cases (including Alternative Minimum Tax, IRA and other retirement plan taxes, nanny taxes, first-time homebuyer credit repayments, and other situations) are listed on page A-3 of Pub 4012.
- Foreign students and visiting foreign scholars may be required to file US income tax returns even if their income was extremely minimal or possibly even zero. (These situations are outside the scope of our VITA site, unfortunately. The exact nature of each student's tax situation can depend on the bilateral tax treaty between the US and the student's home country, and so it is incumbent upon individual students to sort out their tax filing issues the best they can. The IRS offers guidance here and here.)
As you can see, it can easily get complicated. Many people who can be claimed as dependents may not even know they can be claimed as dependents, because the rules are so complex. Some people who are technically "self-employed" or otherwise responsible for reporting and paying their own payroll tax apparently do not fully understand their situations (as infamously illustrated by Treasury Secretary Timothy Geithner on his own tax returns a few years ago!)
Who cares?To file or not to file? For most people who are not required to file, the filing requirement threshold dollar value is beside the point because there are so many advantages to filing, even when it is not legally required.
Advantages of filing a tax return even when not required:
- To claim a refund: If income taxes were withheld from your pay (check boxes 2 and 17 of your W-2 to determine this), you may be due a refund. Also, you may be due to receive a refund if you are eligible for refundable tax credits (e.g., the Earned Income Credit, the Additional Child Tax Credit, the American Opportunity Credit, etc.)
- To create official record documents which may be useful later: When you file a tax return, you are declaring--under penalty of perjury--that you have accurately collated and summarized all pertinent financial documents. That contemporaneously created record could be very useful down the road. For example, if you later apply for financial aid for higher education, for a property tax abatement, for home heating assistance, for health care subsidies, for a mortgage or other loan, or in a variety of other situations (applications for naturalized citizenship, applications for professional licenses, divorce and child support hearings, bankruptcy, student loan hardship deferrals) you may find it very helpful to have copies of your old tax returns for those purposes. In some cases, you may be asked to document your income (and/or your record of tax compliance) over several prior years, and that may be a challenge for many people who did not file tax returns, because they did not hold onto the old W-2s, etc. and they may find it hard to track down old employers, etc. By contrast, if you filed a tax return--even if you lost your copy--you can order free transcripts from the IRS, which provide the key relevant information from your old returns.
- To preempt a criminal from fraudulently filing a tax return using your name and SSN (or at least mitigate the damage as quickly as possible): Sadly, this is a growing problem and my old classmate Nina Olson, the National Taxpayer Advocate, says that the IRS has been unable to deal with it adequately. The IRS has made it way too easy for someone to use your name and Social Security number to file a completely fabricated return in order to get a large refund. The IRS has operated under enormous political pressure to "get the tax refunds out quickly!" and their normal practice is to issue refunds very fast and only ask questions later--often much later! Criminals have exploited this weakness in the system to get large refunds based on filing returns under other people's identities. Unless you yourself file a return, the IRS may have no easy way even to contact you and notify you promptly that somebody else has already filed a return in your name and SSN.
- To set the record straight, establish a clear record of tax compliance, and start the statute of limitations running: You may be absolutely *sure* that you are not subject to a filing requirement, but what if the IRS has records that disagree with yours (not necessarily due to criminal intent by others, but perhaps due to bad penmanship on another taxpayer's tax documents or incorrect W-2s or 1099s filed by employers and financial institutions.) Or perhaps you work in a business where there is a lot of sketchily documented income (e.g., as a waitress with cash tips.) If you don't file a tax return, the Internal Revenue Service could conceivably come after you many years down the road, at a time when it might be very hard for you to reconstruct your records accurately. This may be especially important if you plan to apply for a professional license which requires a documented record of tax compliance (e.g., attorney, professional tax preparer, etc.) If there is a disagreement between IRS records and your records, it is best for you to learn about that sooner rather than later, at a time when it is still relatively easy for you to obtain the documents that will support your side of the story. Once you file a return, the IRS and state tax authorities generally have a statute of limitations which gives them three years to challenge the information--unless they can show a major omission on your part, which gives them additional time, or deliberate fraud, which gives them forever! But the burden of proof is on them in those cases. If you don't file a timely tax return, the burden of proof that you complied with tax law this year is on you--potentially for decades to come!
There are other benefits to filing a tax return even when you are not legally required to do so. It can be educational and enlightening for a young person to work through the process in a thoughtful and observant way--and good practice for the future, when the stakes will be higher and your tax returns more complex. Also, don't forget that in some cases you may have a state tax filing requirement even if you don't have enough income to require filing a federal return. New York State tax filing requirements are available here.
That said, I can think of a few categories of people who are not obligated to file who may reasonably decide not to go to the trouble of filing. A conscientious senior citizen in poor health with very limited income, virtually all of it from Social Security, who brings *all* her relevant tax documents to AARP-Tax Counseling for the Elderly, where a trained and certified volunteer interviews her, asking a number of questions to make sure that all possible sources of income and tax liability have been assessed, and concludes she does not need to file, may quite reasonably decide to take that advice, because it is not worth the stress of dealing with so much fine print and jargon.
After all, remember that filing a tax return is not a frivolous thing to be undertaken lightly. Filing a tax return means you--the taxpayer!--are signing the following statement: