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General Rules

  • 647. Who must file a return?

    • Editor’s Note: Taxpayers who are not ordinarily required to file a tax return might consider filing a 2020 and 2021 tax return if they did not receive the full amount of the first or second round economic stimulus payments. These taxpayers may be eligible for a recovery rebate credit if they were eligible for the economic impact payments but have not received the full amount of their payment. Those taxpayers must file a federal income tax return to claim the recovery rebate credit even if they don’t typically file a tax return.

      The 2017 Tax Act modified the rules governing who is required to file a tax return for tax years beginning in 2018 through 2025. Because of the suspension of the personal exemption, unmarried individuals whose gross income exceeds the applicable standard deduction (see Q 752) are now required to file a tax return for the year.

      Married individuals are required to file a tax return if the individual’s gross income, when combined with his or her spouse’s gross income, is more than the standard deduction that applies to a joint return and (1) the individual and his or her spouse at the close of the tax year shared the same household, (2) the individual’s spouse does not file a separate return, and (3) neither the individual nor his or her spouse is a dependent of another taxpayer who has income (other than earned income) in excess of $500.1

      A return must be filed by every individual whose gross income equals or exceeds the following limits in 2023:2

      (1)    Married persons filing jointly – $27,700 (if one spouse is 65 or older – $29,200; if both spouses are 65 or older – $30,700).

      (2)    Surviving spouse (see Q 756) – $25,900 (if 65 or older – $28,800).

      (3)    Head-of-household (see Q 757) – $20,800 (if 65 or older – $22,300).

      (4)    Single persons – $13,850 (if 65 or older – $15,350).

      (5)    Married persons filing separately – $13,850 (if 65 or older – $15,350).

      (6)    Dependents – every individual who may be claimed as a dependent of another must file a return for 2023 if he has unearned income in excess of $1,250 (plus any additional standard deduction if the individual is blind or elderly) or total gross income that exceeds the sum of any additional standard deduction if the individual is blind or elderly plus the greater of (a) $1,250 or (b) the sum of (i) $400 plus earned income.

      Blind taxpayers may need to attach supporting documentation to a tax return to support a claim for the additional standard deduction. The additional standard deduction for taxpayers who are blind at the end of the tax year is not considered when determining a taxpayer’s filing threshold amount.

      The kiddie tax rules have changed in recent years. Before 2018 and after 2020, certain parents whose children are required to file a return may be permitted to include the child’s income over $2,100 on their own return, thus avoiding the necessity of the child filing a return. See Q 679. The 2017 Tax Act provided new rules with respect to the unearned income of minors. That income was to be taxed at the rates applicable to trusts and estates, while the earned income of minors would be taxed at the ordinary income tax rates applicable to single filers. The SECURE Act repealed this rule for tax years beginning in 2020 and thereafter. For 2018 and 2019, taxpayers can choose which set of rules to apply. See Q 679.

      A taxpayer with self-employment income must file a return if net self-employment income is $400 or more. See Q 784.

      Planning Point: A taxpayer must file a return if any of the following special taxes are due:

      1. Alternative minimum tax (see Q 779 for more information on the expanded AMT exemption that applies after 2017).
      2. Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. Taxpayers filing a return only because this tax is owed can file Form 5329 by itself.
      3. Household employment taxes. Taxpayers can file Schedule H by itself if filing a return only because this tax is owed.
      4. Social Security and Medicare tax on tips a taxpayer did not report to an employer or on wages received from an employer who did not withhold these taxes.
      5. Recapture of first-time homebuyer credit.
      6. Write-in taxes, including uncollected Social Security and Medicare or RRTA tax on tips that were reported to an employer or on group-term life insurance and additional taxes on health savings accounts.
      7. Recapture taxes.
      8. Additional tax on a health savings account (HSA), Archer MSA, or Medicare Advantage MSA distributions. If the taxpayer is filing a return only because he or she owes this tax, he or she can file Form 5329 by itself.
      9. Wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare taxes.

      Even if not required to file a federal tax return, a taxpayer may want to file one if withholdings of tax have occurred, or he or she is eligible for a refundable credit, such as the Earned Income Credit.

      1.     IRC § 6012(f).

      2.     IRC §§ 6012(a), 63(c), 151; P.L.115-97, Rev. Proc. 2020-45.

  • 648. Must a taxpayer make estimated tax payments and what is the penalty for failure to make a required installment payment?

    • Taxpayers are generally required to pay estimated tax if failure to pay would result in an underpayment (see below) of federal income tax for the current taxable year.1 The computation of estimated tax for the tax year includes the alternative minimum tax, additional Medicare tax, net investment income tax, and self-employment tax (see Q 777 and Q 784, respectively).2 An underpayment is the amount by which a required installment payment exceeds the amount, if any, paid on or before the due date of that installment (due dates are April 15, June 15, September 15 of the current tax year and January 15 of the following tax year).3 The required amount for each installment is 25 percent of the required annual payment.4

      Planning Point: The IRS took the opportunity to remind taxpayers in 2020 that unemployment compensation benefits are subject to federal income tax. This includes expanded unemployment benefits created by the 2020 CARES Act. However, the IRS reminds taxpayers that withholding is completely optional. Taxpayers can elect to have a flat 10 percent withheld and paid over automatically to the IRS by submitting Form W-4V, Voluntary Withholding Request, to the agency paying the benefits. Taxpayers should not send this form to the IRS.

      Taxpayers also have the option of making quarterly estimated tax payments under the usual rules to cover their anticipated tax liability.

      Generally, the “required annual payment” is the lesser of (a) 90 percent of the tax shown on the return for the taxable year (or, if no return is filed, 90 percent of the tax for the year), or (b) 100 percent of the tax shown on the return for the preceding year (but only if the preceding taxable year consisted of 12 months and a return was filed for that year).5 However, if an individual’s adjusted gross income for the previous tax year exceeded $150,000 ($75,000 in the case of married individuals filing separately), the required annual payment is the lesser of (a) 90 percent of the current year’s tax, as described above, or (b) the applicable percentage of the tax shown on the return for the preceding year (110 percent).6

      On the other hand, the taxpayer may make required installments pursuant to the “annualized income installment” method if the amount of tax so computed is less than the tax computed pursuant to the two alternatives described above. This method requires the taxpayer to compute the tax for the current year by annualizing the taxable income, alternative minimum taxable income and adjusted self-employment income for the months in the taxable year ending before the due date of the installment. For the first quarter installment payment, the taxpayer must pay 22.5 percent of the annualized tax. For the second quarter installment payment, the taxpayer must pay 45 percent of the annualized tax less the amount of tax paid with the first installment. For the third and fourth installment payments, the taxpayer must pay 67.5 percent and 90 percent, respectively minus the aggregate amount of tax paid with the prior installments.7

      Regardless of the method used to calculate estimated taxes, there is no penalty for failure to make estimated payments if: (1) the tax shown on the return for the taxable year (or, if no return is filed, the tax) after the deduction for tax withholdings is less than $1,000; or (2) the taxpayer owed no tax for the preceding year (a taxable year consisting of 12 months) and the taxpayer was a U.S. citizen or resident for the entire taxable year.8 Otherwise, underpayment results in imposition of an interest penalty, compounded daily, at an annual rate three percentage points greater than the short-term applicable federal rate as adjusted quarterly.9 (See Q 676.)

      If on the Form 1040 for the current year, the taxpayer elects to apply an overpayment to the succeeding year’s estimated taxes, the overpayment is treated as a credit with respect to installments of estimated tax due on or after the date(s) the overpayment arose in the order in which they become due. Depending on the amount of the overpayment, it may be sufficient to avoid or minimize the penalty for failure to pay estimated income tax with respect to such tax year.10 For application of the estimated tax to trusts and estates, see Q 795.

      1.     IRC § 6654.

      2.     IRC § 6654(d)(2)(B)(i).

      3.     IRC §§ 6654(b), 6654(c).

      4.     IRC § 6654(d)(1)(A).

      5.     IRC § 6654(d)(1)(B).

      6.     IRC § 6654(d)(1)(C).

      7.     IRC § 6654(d)(2).

      8.     IRC § 6654(e).

      9.     IRC § 6621(a)(2).

      10.        Rev. Rul. 99-40, 1999-2 CB 441.

  • 649. What is an individual’s “taxable year”?

    • The basic period for computing income tax liability is one year, known as the taxable year. The taxable year may be either (a) the calendar year or (b) a fiscal year. A “calendar year” is a period of 12 months ending on December 31. A “fiscal year” is a period of 12 months ending on the last day of a month other than December.1

      Although most taxpayers report tax liability based on a calendar year, a taxpayer may choose to report tax liability based on a fiscal year. However, whichever year is used, it must generally correspond to the taxpayer’s accounting period.2 Thus, if the taxpayer’s accounting period is based on a fiscal year, tax liability cannot be determined by the calendar year. But if the taxpayer has no accounting period and does not keep books, a calendar year must be used.3 Once a tax year has been chosen, the taxpayer cannot change from a calendar year to a fiscal year or vice versa without the permission of the Internal Revenue Service.4

      A principal partner must use the same tax year as the partnership and cannot change to a different tax year unless it establishes to the IRS that there is a business purpose for doing so.5 Under certain circumstances, partnerships, S corporations, and personal service corporations must use the calendar year for computing income tax liability.6

      A short period income tax return must be filed if (1) the taxpayer changes an annual accounting period, or if (2) the taxpayer has been in existence for only part of a taxable year.7 For this purpose, a short period is considered a “taxable year.”8

      For an individual taxpayer, if a short period income tax return is required due to a change in accounting period, the income during the short period must be annualized, and deductions and exemptions prorated.9 The computation is as follows:

      Step 1: Compute the adjusted gross income for the short tax year. Then subtract actual itemized deductions (do not take the standard deduction).

      Step 2: Multiply the dollar amount of the personal exemptions (prior to 2018) by the number of months in the short year and divide that result by 12.

      Step 3: Subtract the amount in Step 2 from the amount in Step 1. This is modified taxable income.

      Step 4: Multiply modified taxable income (Step 3) by 12 and divide the result by the number of months in the short period. This is the annualized income.

      Step 5: Compute the tax on the annualized income (using the tax rate schedule then in effect).

      Step 6: Multiply the tax (Step 5) by the number of months in the short period and divide the result by 12. This amount is the tax for the short period.

      However, if a short period income tax return is required by a taxpayer who was not in existence for the entire tax year, annualized income is not required.10

      Generally, for the final regulations affecting taxpayers who want to adopt an annual accounting period (under IRC Section 441), or who must receive approval to adopt, change, or retain their annual accounting periods (under IRC Section 442), see Treasury Regulation Sections 1.441-0, 1.441-1, 1.441-2, 1.441-3, 1.441-4; TD 8996.11

      More specifically, the rules for establishing a business purpose to justify the use of a taxable year and obtaining approval to adopt, change, or retain an annual accounting period are found in Revenue Procedure 2002-39.12

      See Revenue Procedure 2003-6213 for the exclusive procedures developed in accordance with IRC Section 442 that allow fiscal reporting year individuals (e.g., sole proprietors) to obtain automatic approval to change to calendar year reporting.

      The exclusive procedures for (1) certain partnerships, (2) S corporations, (3) electing S corporations, (4) personal service corporations, and (5) trusts to obtain automatic approval to adopt, change, or retain their annual accounting period are set forth in Revenue Procedure 2006-46.14

      1.     IRC §§ 441(a), 441(b), 441(d), 441(e).

      2.     IRC § 441(f)(1).

      3.     IRC § 441(g).

      4.     IRC § 442.

      5.     IRC § 706(b)(2).

      6.     See IRC §§ 441(i), 706(b), 1378.

      7.     IRC § 443(a).

      8.     IRC § 441(b)(3).

      9.     IRC §§ 443(b), 443(c).

      10.    Treas. Reg. § 1.443-1(a)(2).

      11.    67 Fed. Reg. 35009 (5-17-2002).

      12.    2002-1 CB 1046, as modified by, Notice 2002-72, 2002-2 CB 843, and further modified by, Rev. Proc. 2003-79, 2003-2 CB 1036.

      13.    2003-2 CB 299, modifying, amplifying, and superseding, Rev. Proc. 66-50, 1966-2 CB 1260, and modifying and superseding, Rev. Proc. 81-40, 1981-2 CB 604. See also Ann. 2003-49, 2003-2 CB 339.

      14.    2006-45 IRB 859.

  • 650. What are the basic steps in computing an individual’s tax liability?

    • The computation is made up of these basic steps:

      …Determine gross income for the taxable year (see Q 651 to Q 710).

      …Subtract certain deductions from gross income to arrive at adjusted gross income (see Q 715, Q 716).

      …Prior to 2018 and after 2025, determine the number of personal and dependency exemptions (multiplied by the personal exemption amount and deducted from adjusted gross income) (see Q 728, Q 729).

      …Compute total amount of itemized deductions (subject to certain limitations) (see Q 731 to Q 745) and compare that amount to the standard deduction (see Q 752), and (generally) the greater amount, is also deducted (in addition to exemptions, which were suspended from 2018-2025) to arrive at taxable income.

      …The proper tax rate is applied to taxable income to determine the tax (see Appendix A).

      …The following amounts are subtracted from the tax to determine the net tax payable or overpayment refundable: (1) credits (see Q 758), and (2) prepayments toward the tax (e.g., tax withheld by an employer and/or estimated tax payments).

      The computation of the alternative minimum tax is explained in Q 777.