You're never too young or too old to file a return. The key is how much money you make. Here are the gross income levels that trigger the requirement to file a return.
These figures are for 2006 returns and will increase in future years to reflect inflation.
Single
Under 65 – $8,450
65 and older – $9,700
Married filing jointly
Both under 65 – $16,900
One 65 or older – $17,900
Both 65 or older — $18,900
Married filing separately
Any age — $3,300
Qualifying widow(er) with dependent child
Under 65 — $13,600
65 and older — $14,600
Head of household
Under 65 — $10,850
65 and older — $12,100
*Gross income does not include untaxed Social Security benefits or interest from tax-free municipal bonds. If you can be claimed as a dependent on someone else's return, special rules apply.
See Exemptions and Dependents for more information.
You fall in the "singles" category if you aren't married at year-end and don't qualify as a qualifying widow(er) with dependent child or head of household. If you qualify, filing as a qualifying widow(er) with dependent child or head of household will save you money.
If you are married on the last day of the year, you are entitled to file a joint return. This applies even if you are separated from your spouse and pursuing a divorce. Unless the divorce is final by the end of the year, the IRS considers you married. An exception to last-day-of-the-year status does exist. If you were married for any part of the year but were widowed at year-end, you may file a joint return for yourself and your deceased spouse.
For up to two years after the year in which your spouse dies you may still be eligible to use the joint-return rates. However, most widows and widowers won’t qualify.
To be a qualifying widow(er) with dependent child in the eyes of the IRS, you basically have to have a child living with you. In fact, there are four tests:
You must have been eligible to file a joint return for the year your spouse died.
You must not have remarried. (If you did, you can use the joint-return rates by filing with your new spouse.
You must have a child or stepchild who qualifies as your dependent.
You must have paid more than half the cost of keeping up your home, which is the principal residence of the child for the entire year (except for temporary absences). In other words, if your children are grown and have moved out, you won’t qualify.
This filing status almost never makes sense. There are rare circumstances in which it makes sense. It usually involves spouses with similar incomes who by splitting the income on separate returns can claim deductions that would elude them on a joint return. One often-cited reason for filing separate returns is if one spouse has significant medical bills. Medical expenses are deductible only to the extent that they exceed 7.5% of a adjusted gross income.
Splitting income on separate returns might squeeze out a bigger medical deduction for one spouse, but only in certain circumstances would the tax savings offset the cost of foregoing the advantages that come by filing a joint return.
There are plenty of disadvantages to filing separately:
One spouse can't claim the standard deduction if the other itemizes. If one itemizes, both must. The phase-out on itemized deductions begins when 2006 AGI passes $150,500 for all filing statuses except married filing separately. On those returns, deductions start to be phased out when AGI passes $75,250. (The thresholds are supposed to rise in the future with inflation.)
On separate returns, you can't claim the child-care credit.
On separate returns, you can't claim either the Hope credit or the Lifetime Learning credit for higher education costs.
You are also blocked from claiming the child tax credit.
The $25,000 passive-loss allowance for active rental real estate investors is forfeited if you file separate returns.
If you receive Social Security benefits, filing separately guarantees that 85% of your benefits will be included in taxable income. On a joint return, 85% of your benefits are taxable only if income exceeds $44,000.
Contributions to traditional individual-retirement-accounts are phased out as income rises from $0 to $10,000 on a separate return.
Note: Some of these separate-return disadvantages don't apply if you and your spouse don't live together at all during the year for which you file separate returns. In some cases the disadvantages don’t apply if you and your spouse haven’t lived together for the last 6 months of the year.
(Although filing separate returns seldom makes sense at the federal level, don't assume the same applies to your state-tax return. In some states, choosing married-filing-separately status can cut your tax bill significantly. Check the instructions with your state return carefully.)
This category causes some confusion, particularly among young people starting out on their own. If you're the only member of your household, you must be the "head," right? Not as far as the IRS is concerned.
To file as head-of-household and the right to more favorable (as compared to single filers) tax rates, you basically have to be providing a home for a child or other relative. To qualify:
You must be unmarried at the end of the year. (Even if you're legally married at year-end, you can pass this test if your spouse didn't live with you during the last six months of the year.)
You must pay more than half the cost of keeping up the principal home for you and a child or other relative you can claim as a dependent. If the dependent is not related you cannot claim head-of-household.
In most cases, you and the child or other relative must share the same house for more than six months of the year. There is an exception, if you are paying more than half the cost of maintaining a home for your dependent mother or father for the entire year. In that case, he or she does not have to live with you in order to qualify for head-of-household tax status. If you are paying more than half the cost of a nursing home for your dependent parent, for example, you can qualify.
When figuring whether you pay more than half the cost of maintaining the house in which you live with a child or other relative, count such expenses as rent, mortgage interest, taxes, insurance on the home, repairs, utilities, domestic help and food eaten in the home. Don't count what you pay for clothing, education, medical treatment, vacations, life insurance or transportation.
If you qualify as a Qualifying Widow(er), you may be able to meet the head-of-household test once your two-year use of the joint rates runs out. Although higher than joint rates, the head-of-household tax rates are lower than those which apply to singles.
Each exemption that you claim on your return reduces taxable income. In 2006 each exemption is worth $3,300. The exemption amount will increase in the future to keep up with inflation. In the 28% bracket, each $3,300 exemption reduces your tax bill by $924. (For 2007 returns, we estimate that exemptions will be $3,400 each.)
Children who are claimed on their parent’s return — and older parents who are claimed as dependents on their children's return — can’t claim their own personal exemptions. And there's a recapture system to reduce the value of personal exemptions for upper-income taxpayers. These crackdowns come at a time when the value of exemptions is at an all-time high. It's up to you to claim all the exemptions that you are entitled.
Regardless of what kind of return you file, you can claim a personal exemption for yourself — unless you can be claimed as a dependent on someone else's return. On a joint return, both husband and wife claim a personal exemption.
Beyond that, you've got to earn these valuable tax savers by meeting a series of tests to determine whether someone qualifies as your dependent. That's not difficult when it comes to a minor child who lives with you. Claiming certain exemptions is more complex. There are additional rules when you try to claim older children, adult relatives or unrelated people as your dependents.
Congress has decided that once your income reaches a certain level, you don't need the tax-saving assistance delivered by exemptions. If your adjusted gross income exceeds the levels shown in the table below your exemptions are in jeopardy. However, in 2006, the maximum amount of exemptions that can be phased out is 2/3rds.)
Loss of Exemptions
Married filing jointly filing status — Loss Begins When AGI Passes $225,750.
Single filing status — Loss Begins When AGI Passes $150,500
Head of household filing status — Loss Begins When AGI Passes $188,150
Married filing separately filing status — Loss Begins When AGI Passes $112,825
For every $2,500 your AGI exceeds the threshold for your filing status, you lose 2% of your exemptions. If you claim just one exemption on your 2006 return, each additional $2,500 of AGI reduces the value of your exemption by $66 (2% of the 2006 exemption value of $3,300. If you claim ten exemptions, each additional $2,500 of AGI cuts the value of your exemptions by $660 (2% of $33,000).
By the time AGI reaches $125,000 above the trigger point, 2/3rds of your exemptions have been wiped out.
A baby born anytime before midnight December 31, 2006, earns a taxpayer a full year's $3,300 dependency exemption and a $1,000 child credit.
There are many types of dependents that allow these tax savings? Someone does not have to be your child or even related to you at all to be your dependent for tax purposes. Since most dependents are the children of the taxpayers claiming them, we’ll start there.
In 2004, Congress tried to simplify things by coming up with a uniform definition of "child" for the tax code. In general, to be a qualifying child, a child must be your child, stepchild, adopted child, foster child, a grandchild, stepchild or descendant of a sibling, such as a niece or nephew. The child must live with you for more than half the year (absences away at school don't count), except in the case of divorced parents in which the custodial parent waives the right to the exemption. If an individual doesn't meet the "qualifying child" tests, he or she can still be your dependent as a "qualifying relative." Some people who qualify as qualifying relatives are parents, grandparents, stepparents, siblings, uncles, aunts, fathers, mothers, sons, daughters, brothers and sisters-in-law. To be your dependent, the person must be a U.S. citizen or a resident of the U.S., Canada or Mexico.
The law prohibits claiming a dependency exemption for someone who files a joint return. This test usually raises its ugly head only in the year a son or daughter you've been supporting gets married. Thus, if the new bride and groom files a joint return, you can lose out on a dependency exemption — even if you meet all the other tests. There's an exception to the joint-return rule. If the couple owes no tax but files jointly simply to reclaim pay withheld during the year, the joint return doesn't eliminate your right to claim the dependency exemption.
This test can deny you an exemption you may feel you deserve. If a person earns more than the exemption amount — $3,300 in 2006 — he or she generally can't be claimed as someone else's dependent. For example; your elderly mother lives with you and the value of the food and lodging you provide and medical bills you pay exceeds 50% of her support. If she earns more than the exemption amount you can't claim her as your dependent. An example of this is if she earned over $3,300 from an interest bearing bank account. (We estimate that the limit will be $3,400 in 2007.)
There's an important exception here. The income test does not apply to a qualifying child under 19 years old or for a child up to age 24 who is a full-time student for at least five calendar months of the year. That means you usually don't have to worry about the gross-income test until your kids are out of college. Regardless of how much a child under 19 or a full-time student under 24 earns, you can claim him or her as a dependent if you pass the other tests.
Because too much income can eliminate your right to a dependency exemption, it's important to know what is included in gross income and what is not included. Essentially, gross income is all income that's not exempt from tax. Earnings from a job or taxable investments count. Social Security benefits don't count, unless they are taxed under the rules. Gifts and insurance proceeds are not included, either; nor is tax-free interest.
If someone's investment income is causing you to fail the dependency exemption test, consider whether it would make sense to suggest a switch to tax-free investments. Although there may be little or no tax benefit to a low-bracket investor, the exemption could be worth more to you than the amount of income lost to a lower yield.
To claim anyone except a "qualifying child" as a dependent, you must provide more than half of his or her support. When children are involved, a new rules says you can claim them even if you don't provide more than half of their support if they don't provide more than half of their own support. A quick example: If you provided 40% of a child’s support and your brother provided 30%, you could claim the child as a dependent if all other tests were met because the child didn’t provide 50% or more of his or her support.
Special rules apply to the children of divorced parents but in almost all cases the parent with custody gets the exemption.
For years, the question of which spouse should claim the exemption for dependent children of divorced parents caused nothing but trouble. Often, the custodial parent would claim the exemption, and so would the noncustodial parent who was providing child support.
To simplify things, the law now generally gives the exemption to the custodial parent named in the divorce decree. If neither parent is named, the custodial parent is the one with whom the child lives for the greater part of the year.
However, it's possible for the noncustodial parent to claim the exemption. That could be beneficial if he or she is in a higher tax bracket than the custodial parent. Another example of a potential tax benefit is allowing a noncustodial parent to claim the new child or college credits that would be denied the other parent because his or her income is too high.
The noncustodial parent may claim the exemption if the custodial parent signs a waiver pledging that he or she won't claim it. Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, is the one for waiving the right to the exemption. The form, which can be generated by TaxCut, must be signed by the custodial parent and attached each year to the return of the noncustodial parent who is claiming the exemption.
There's a special rule for taxpayers divorced before 1985. If the divorce decree awarded the right to claim the dependency exemption to the noncustodial parent, he or she need not file a Form 8332 each year.
Whether or not a parent can claim a child as a dependent, the amount he or she pays for the child's medical care counts when the parent totals up medical costs to see if they are deductible. (Such costs can be written off only to the extent that they exceed 7.5% of adjusted gross income.)
There is an exception to the hard-and-fast rule that a taxpayer provide more than half of someone's support to claim that person as a dependent. When two or more persons together provide more than half of someone's support — and pass all the other dependency tests — one of the providers can claim the exemption if the others agree not to.
The multiple-support agreement generally comes into play when two or more adult children are supporting a parent.
Assume a brother and sister each provide 40% of their mother's support and that either one could claim her as a dependent if it weren't for the 50% test. Form 2120, Multiple Support Declaration, will permit one of them to claim the tax-saving exemption. That form is filed with the tax return of the person claiming the exemption and must be signed by the other provider, certifying that he or she provided more than 10% of the dependent's support and could have claimed her on his own return except for the 50%-support stipulation.
If more than two persons are involved in the multiple-support agreement, the one claiming the exemption must have 2120 forms signed by each person who provided more than 10% of the dependent's support. The providers can decide which one will claim the exemption. It doesn't have to be the one who provided the greatest share of support. You can assign it to the provider in the highest tax bracket — to whom the exemption is worth the most — or rotate the tax break from year to year. You have to file 2120 forms with your return each year you claim a dependent under the multiple-support agreement. TaxCut will generate the form for you.
If you can be claimed as a dependent on someone else's return, special rules apply. Some examples are children being claimed by their parents or adult children who claim their parents. The income threshold for filing a tax return is lower for a person who can be claimed as a dependent. A dependent child must file if earned income from a job or self-employment exceeds $5,150 in 2006. When a dependent parent age 65 or older is involved, the trigger point is $6,400. The threshold is reduced further if the dependent's only income is unearned income, which is income from investments, including interest on a savings account. In that case, a return must be filed if the child's total income exceeds $850 in 2006.
What if the dependent has both earned and unearned income? If unearned income (from savings account interest or mutual fund dividends, for example) is $250 or less, a return is not required until total income exceeds the earned-income limit: $5,150 for a child. If investment income exceeds $250, a return is required at lower levels. When total income exceeds the combination of earned income plus $250, a tax return is required. If your dependent daughter earned $2,000 at a summer job and had $200 of interest from a savings account, then, no return would be required. However, if her investment income was $300, she would have to file even though her total income was just $2,300.
In some cases you should file a return even when there isn’t a filing requirement. One such example is as follows: If you had federal taxes withheld from your paycheck, you need to file a return to get your withholding back.
In some cases, the income of a child under age 18 can be reported on his or her parent’s return. This would eliminate the need for the child to file.
If you are self-employed, you may have to file a return even if you owe no income tax. If income from self-employment is $400 or more, you must file in order to pay the self-employment tax that pays for Social Security and Medicare.
Complicated enough for you? Don't worry, TaxCut knows the rules and will determine if a return is necessary based on your answers to the questions about income.
If a person who qualifies as your dependent dies during the year, you may claim the exemption on your return for that year. As long as the various requirements were fulfilled during the part of the year that the person was alive – even if it was just part of one day – you qualify to claim the full exemption.
A person who can be claimed as a dependent on someone else's return can not claim a personal exemption on his or her own. This primarily affects children claimed on their parent’s returns, but it also applies to anyone who can be claimed as a dependent. One example is an elderly parent who is being supported by their children. The loss of the exemption means more children are required to file returns. Note that a child can not claim a personal exemption if he or she can be claimed on the parent's return. Therefore, even if a parent who qualifies to claim a child is willing to forego the exemption, the child still can’t take the exemption.