Who is Exempt from Filing an Income Tax Return? (Part I)

In general, most American adults should file income taxes. However, for those that would rather not go to all the “trouble”, there are some circumstances when you may be legally exempt from doing so. We will take a look at which scenarios make you exempt from filing and whether or not this is a good option.

In most cases, taxpayers whose gross income is less than the combined standard deduction and personal exemption are not required to file a return. For example, if you are single, your standard deduction for 2013 is $6,100 and your personal exemption is $3900, for a grand total of $10,000. For a married couple filing jointly, this amount doubles to $20,000. For heads of household, the total is $12,850. If you earned less than these thresholds, you may be exempt from filing an income tax return.

There are some exceptions to this rule that typically come up. Here are three of the most common:

Self-Employment Taxes: Though you may have earned under the threshold for your filing category, if you are self-employed, you will still be responsible to pay self-employment taxes (Social Security, Medicare, etc.) if your net income is $400 or higher. Paying these taxes will require you to file a return.

FICA Taxes for Household Employees: If your earnings do not meet the income tax filing thresholds, it is not likely that you have employees in your home. However, this may come up if you have a sizable amount of savings you are living on, but little to no income during that tax year. In these cases, taxpayers often think they do not need to file a return. Whenever you have employees of any kind, you need to make sure you take care of their FICA taxes, which automatically requires that you file.

Premature IRA Withdrawals: Many taxpayers who fall upon hard times decide to make premature withdrawals from their retirement plans. You should avoid this (if at all possible) for two reasons:

  1. When you make an early withdrawal from your retirement account, you are not only losing the principle amount you withdrew later on, you are also losing out on the power of compound interest and/or capital appreciation over the time period this amount is invested. This makes it doubly hard to catch up, as you get closer to retirement.
  2. Premature withdrawals are subject to an additional 10% penalty on top of whatever other tax is owed. So even if your income is low enough that you would not owe any tax at all, you would still be responsible for this 10% penalty, which will also require you to file a tax return.

In Part II of this series, we will discuss claiming a refund and different tax credit eligibilities.

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