Good Reasons to File a 2020 Tax Return Even if Normally Not Required
Most people with gross income of $12,400 or more ($24,800 if your filing status is married filing joint) must file a federal income tax return.
Some people, however, such as those with a lower income or whose income is made up solely of income exempt from tax, are not required to file. If that is you, you should know that even if not required to file, there are certain situations for which you should still consider filing a return.
First, and most basic, you may have had income tax withheld from a source of your income. If so, my guess is, you prefer not to just make a "gift" of the withheld tax to Uncle Sam, so you definitely should think about filing a return, if for no other reason than to get those taxes refunded to you.
But even if that isn’t the case, you may also be eligible for certain tax credits, like the earned income tax credit, the recovery rebate credit and others. So how do you decide whether to file a tax return?
In most cases, amount of income, filing status and age determine if someone must file a tax return. Other rules may apply if you are self-employed or can be claimed as a dependent of someone else. But there are other reasons someone must file. The "Interactive Tax Assistant" at irs.gov can help you determine if you need to file a return.
Also, if the answer to any of the following questions is yes, you might be due a refund, but you will have to file a tax return to get your money:
- Did an employer withhold federal income tax from your pay?
- Did you make estimated tax payments?
- Did you overpay taxes in 2019, and have your refund applied to 2020 taxes?
The availability of the "Recovery Rebate Credit" (RRC) is another reason you may should file even if otherwise not required.
Granted, most people who are eligible have already received the full amount for the RRC in the form of "Economic Impact Payments" (EIP). But some people may still be eligible to claim the RRC if (1) they didn't get Economic Impact Payments or (2) received less than they were entitled. Where this is the case, people must file a tax return to claim the RRC even if they aren't normally required to file.
Some good news here; those who don't normally file taxes can use "IRS Free File" (again, see irs.gov) to claim this credit. The maximum EIPs for qualifying individuals were:
- $1,200 per person and $500 per qualifying child for the first payment
- $600 per person and $600 per qualifying child for the second payment
If you're eligible for the RRC, you will need to know the amount of any EIPs you already received to calculate the credit to which you are still entitled.
Other reasons to file even though not required include benefitting from education credits (people who pay certain higher education expenses may qualify for one of two education credits even if they don't owe any taxes), as well as the previously mentioned Earned Income Credit.
Before we go further, here are a few important pandemic-related tax issues you should be about this year:
- Unemployment benefits are taxable, to the surprise of many. If you received unemployment income, watch your mail for a Form 1099-G that reports to you the amount received.
- There's a new rule to help people who lost their job or had a change in income in 2020. Filers can use their 2019 earned income to figure their Earned Income Credit, if their 2019 earned income was more than their 2020 earned income.
- The same new rule also applies to the Additional Child Tax Credit.
- Essentially, you can choose which year’s income best maximizes your available credits.
Finally, if you want to file with the least amount of hassle and to receive your refund the soonest that you can, file your return electronically and choose direct deposit of your refund. Paper filed returns have historically been processed much slower and refunds by paper check can take months as opposed to a couple of weeks to be issued. They are also much more prone to errors in processing.
The pandemic has acerbated the problem. Due to shutdowns, the IRS is still trying to unearth and process millions of paper-filed tax returns from 2019, and many who filed that way almost a year ago are still waiting on refunds. Do yourself a favor, and avoid the stacks by filing electronically.