There is nothing certain in life other than death and taxes. Everyone has to pay taxes and file returns, well not everyone. There are some exemptions. This brings us to the question on who should pay taxes and more importantly, how much money do you have to make to file a tax return?
Standard deduction and tax
The federal government fixes a standard deduction rate – an amount that can be deducted by you straightway from your income before calculating the tax you owe. The income you have earned, which is lesser than or equal to the standard deduction is exempt from tax, which means you need not pay tax for it. You need not have to file a return if your income is below the threshold level[i].
If your tax filing status is single, that is if you have to file taxes as an individual, you then enjoy a standard deduction or threshold level of $12,000[ii]. This essentially means if your income is $12,000 or lesser, you are free from paying taxes and from filing returns.
If you are married and filing returns jointly or as a widow/widower, then the standard deduction is $24,000.
If you are married, but both of you are filing returns separately then the applicable standard deduction is $12,000.
If you are the head of the household, you have more leeway and your standard deduction limit as an individual is $18,000.
An additional benefit has been given for the blind and elderly (above 65). They get an additional deduction of $1,300. If unmarried, the additional deduction would be $1,600.
So, someone who is over 65 and unmarried would enjoy a standard deduction of $25,600.
Filing the returns
The tax return is a document that outlines your income earned, tax due and/or refund due. If you are not required to pay tax, you usually need not file a return. However, there are some special cases here.
If you have refunds due from the IRS, because of federal taxes deducted from your paycheck, then you need to file a tax return to be able to claim the refund. Irrespective of whether your income is below the standard deduction, you need to file the return to get your refund.
Similarly, if you have earned a credit on income tax, you would need to file a return. Some categories of workers earning a low income are eligible for an earned credit on income tax[iii], which varies from $510 to $6.318. The amount depends on the exact income you earn and the number of children you have. If you have earned an income tax credit, you need to file a return to be able to claim it.
Children and dependents have to file tax returns on any income they earn. A distinction is made here between earned and unearned income. Earned income is that, which is earned from employment. Unearned income would be interest, dividends, compensation, social security benefits, etc.
If you are self-employed and providing services or running a business on a proprietorship or partnership basis, then you have to file a return if your net earnings are $400 or more[iv].
Filing an income tax returns is not the same as paying taxes. Even if you are not required to pay taxes, you may need to file returns for various reasons, including claiming a refund.