Knocking down a big -- or little -- salary is not the only reason someone may need to file a tax return. If you've received income, you'll most likely need to file a return, even if you spent the previous year looking for a job instead of working at one. By staying on top of filing requirements, you can avoid a nasty tax surprise in the future.
The most common reason for filing a tax return is because of money from work, known as wages. Throughout the year, your employer withholds money from your wages to pay your estimated taxes for the year. Because of this, you are not required to file a tax return if your annual income is below a certain level. This level depends on your filing status and age. While you may not have to file a tax return on your wages, it is usually a good idea. You may be eligible for a number of tax credits and deductions. These can generate a juicy refund check at the end of the year.
Just because someone isn't working doesn't mean she isn't making money. If your property or investments generated money over the year, you need to file a tax return. There are two types of taxable investment income. First, if you sell your house, your investments, or any other type of property for more than its original purchase price, you must report the gain to the IRS. Second, your property can also generate income. This could be rent from a rental property, dividends from stocks, or interest from your bonds or bank account. The IRS considers investment income to be taxable income and wants its share of this money.
If you are receiving alimony payments as part of a tax settlement, you also need to file a tax return. Even though your ex-spouse is the one working, you are the one receiving the benefit of the money sent as alimony. However, child support payments are tax free. When you create a divorce settlement, the judge will clearly define what part of your payments are alimony and what part are child support. This helps save you a headache when you file your taxes.
When you withdraw money out of a retirement account, you also need to file a tax return. The IRS keeps a close eye on retirement accounts because of their tax advantages. If you take money out of your 401(k) or your Traditional IRA, you'll owe income tax on the entire withdrawal. Also, you'll need to pay an extra 10 percent penalty since you're taking out money before you turn 59 1/2. If you take money out of your Roth IRA, you only have to pay taxes if you take out more than you contributed over the years since you funded your Roth IRA with after-tax dollars.
There are a variety of other reasons to file that are often overlooked. You also need to file a tax return if you have debt forgiven, if you receive royalties on your creative works and if you give someone over $13,000 worth of gifts in one year. You might also benefit from some tax credits by filing a return, even if your income level doesn't require you to file. If you are unsure whether you need to file a tax return, it is best to go ahead and do so. If you miss an uncommon tax law, it will seem more like an honest mistake. If you don't file, you may lose out on money that could come back to you, or you could draw the attention of the IRS for all the wrong reasons.
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