A quite common question that I hear a lot of is “Do I have to file taxes on my income?”. This question comes from a lot of different types of people. The confusion comes because some income is taxable, and some income is not. Also, for low-income earners there are minimum filing requirements. This can get even more confusing because these numbers change based on one’s filing status, age and the type of income received.
A good example of a type of income with different minimum standards for filing is Social Security income. We will further explain this later in the article, but we will start by discussing these minimum filing requirements and explaining how they change with your filing status. After that we will go through the common types of income that are taxable and then the common nontaxable sources of income.
What Is Taxable Income?
The IRS says income can be in the form of money property or services you receive in the tax year. The two basic forms of income are earned and unearned. Most income that you receive is fully taxable and must be reported on your federal income tax return unless it is specifically excluded by law.
Earned income includes money received from an employer in exchange for work or money you make working for yourself. Unearned income includes money that you did not directly work for such as interest or dividends, Social Security payments or alimony.
Minimum Income Requirements
The minimum income requirements differ based on how you plan to file. There are five different status’ that you can use to file. They are single, married filing jointly, qualifying widower, married filing separately and head of household. If you earn up to or less than the minimum income as determined by your filing status, you are not required to file a tax return.
Single filers are taxpayers who file their federal income tax return with the IRS under the filing status of “single”. This filing status is used by a taxpayer who is unmarried and does not qualify for any other filing status.
- Single under age 65: $12,400
- Single and 65 or older: $14,050
Married filing jointly refers to a filing status for married couples that have wed before the end of the tax year. When filing taxes under married filing jointly status a married couple can record their respective incomes, deductions credits, and exemptions on the same tax return.
- Married filing jointly, both spouses under 65: $24,800
- Married filing jointly, one spouse age 65 or older: $26,100
- Married filing jointly, both spouses 65 or older: $27,400
Married filing separately is a tax status used by married couples who choose to record their incomes, exemptions, and deductions on separate tax returns. Although some couples might benefit from filing separately, they may not be able to take advantage of certain tax benefits.
- Married filing separately, any age: $5
Head of household is generally an unmarried taxpayer who has dependents and paid for more than half the costs of the home. This filing status commonly includes single parents and divorced or legally separated parents by the last day of the year with custody.
- Head of household under age 65: $18,650
- Head of household age 65 or older: $20,300
Qualifying widow is a filing status that allows you to retain the benefits of the married filing jointly status for two years after the year of your spouse’s death. You must have a dependent child to file as a qualifying widow or widower.
- Qualifying widow(er) under the age of 65: $24,800
- Qualifying widow(er) age 65 or older: $26,100
What Types of Income Are Taxable?
To figure out where you fall in terms of the above minimum requirements once you have figured out your filing status you would next need to calculate your taxable income. Remember taxable income can be earned and unearned income. Below I will break down each category of taxable income.
- W-2 Wage or Salary or Independent Contractor
- Alimony received if divorce decree was made on or before 12/31/2018
- Bartering Income
- Canceled or Forgiven Debt
- Pension and Annuity Income
- Retirement Plan Income
- Social Security Benefits if you had additional income on top of social security, this can become taxable. I will further discuss this later in this article.
- Tips and Gratuities
- Unemployment benefits
- Back Pay
- Bonus Benefits
- Business Income
- Capital Gains
- Clergy Pay
- Disability Benefits
- IRA or 401k Distributions
What Types of Income Are Nontaxable?
As most income is taxable there are a few exceptions. This is very important to know. As important as it is to make sure that all taxable income is reported so you do not raise red flags with the IRS it is also important to know what income does not have to be reported. The last thing that you would want to do is pay taxes on income that you did not have to. Not to mention the more income reported the higher tax bracket you put yourself at.
Some examples of nontaxable income are:
- Workers Comp Benefits
- Child support
- Life Insurance Proceeds
- Social Security Benefits (Can be non-taxable based on if you have additional income and how much)
- Capital Gains on the sale of primary home
- Money received as a gift or inherited assets, go fund me accounts or other personal fundraising sites
- Canceled debts intended as a gift
- Scholarships or fellowship grants
- Foster care payments
- Federal Income Tax Refund
- Money Rolled over from one retirement account to another
Are Social Security Benefits Taxed?
There is a lot of confusion when it comes to when social security benefits are taxable and when they are not. A lot of people believe that social security is 100% not taxable. This is not true. If a taxpayer receives additional income, then a portion of the social security can become taxable.
The next confusing part of this equation is it is not straight based on the full amount of income that you have. To figure out if or what amount of your social security benefits become taxable with the additional income you must first figure out your provisional income.
Provisional income is determined by taking one-half of your social security benefits and all other income you receive. This does include tax-exempt interest. The percentage of benefits a taxpayer includes in income is limited to zero when below the minimum base amount, 50% when provisional income is in between the lower base amount and the upper base amount, and 85 % when provisional income is above the upper base amount.
|Filing Status||50% Lower Base||85% Upper Base|
|Head of Household||$25,000||$34,000|
|Married Filing Separately||$25,000||$34,000|
|Married Filing Jointly||$32,000||$44,000|
All this income must be reported on your Form 1040 every year. It is especially important that not only all the income is reported on this form but also it is put in the right spots. You need to include W-2 income, taxable interest, and ordinary dividends on the 1040.
Schedule 1 allows you to report other types of income such as alimony, unemployment, and business income. Schedule 1 also allows you to make adjustments to income such as contributions to health and savings accounts, contributions to a traditional IRA, interest paid on student loans, alimony paid if the divorce decree is before 2019, and more.
For more information on where income goes on the 1040 form, visit the 1040 form page on the IRS website.
In conclusion the more different types of income that you have the more complex the tax filing becomes. Obviously, the more sources of income that you have the more money you are making so don’t stop making money to make your tax filing easier.
When you have multiple sources of income I would highly recommend hiring a true tax professional, a CPA or Enrolled Agent, that has the knowledge of tax law to assist you in your filing. Not only will they save you money in keeping that income down as low as legally possible but they can make sure not to set you up with the possibility of an examination or audit with the IRS because they can make sure things are done correctly.