Not working during the year doesn't mean you can't, or don't have to, file an income tax return. The IRS may require it. Even if you don’t have to file, you might still want to since it can limit the amount of time the IRS has to audit you and may even get you a refund for taxes you never paid.
Whether you’re unemployed, a student or just receive income from sources other than work, you can always file a tax return with the Internal Revenue Service. In fact, the IRS may require that you file since the factors that determine your tax filing responsibilities don’t take into account whether you work or not. Even if you don’t have to file, you might still want to since it can limit the amount of time the IRS has to audit you and may even get you a refund for taxes you never paid.
Filing Requirements & Taxable Non-employment Income
Wages earned from work aren’t the only type of income that’s taxable. This is why not working, by itself, may not always eliminate the need to file a tax return. Gross income – your total income that’s subject to income tax – includes your annual earnings from all sources that aren’t specifically exempt from tax. Some common examples of taxable income include unemployment compensation; earnings from investments such as interest, dividends and gains on stocks, certain disability pensions, and even gambling winnings.
The IRS typically requires a return when your total gross income is equal to or more than the sum of the standard deduction for your filing status and the personal exemption you’re entitled to take. For the 2016 taxation year (the return you file in the spring of 2017) that gross income threshold starts at $10,350 for a single person under the age of 65 but can rise to $23,200 if you're over 65 and part of a married couple filing jointly. See IRS document 554 to find which gross income level applies to you.
Tax Refunds for the Unemployed
You might want to file a tax return for a year you didn’t work, or aren’t required to file, if you’re eligible for any refundable tax credits. Refundable credits are treated as taxes paid, regardless of whether you report any income or pay any tax for the year, which can create tax refunds for you. These credits include the earned income credit, the additional child tax credit and the American opportunity credit. The earned income credit does require at least some earned income, so be careful to read the requirements closely.
Statute of Limitations on IRS Audits
In most cases, the IRS can conduct an audit on a given tax year for up to three years after a return is filed. If you don’t file a return because you didn’t work, this three-year statutory period never starts running until the return is filed. In other words, never filing a return for a tax year gives the IRS an unlimited amount of time to audit you for that year.
Unemployed Students May Need to File
If you’re an unemployed student you may need to file a tax return in order to complete the Free Application for Federal Student Aid, or FAFSA, process. Your gross income must include all money you earn from a work-study arrangement. Despite being part of a financial aid award, work-study income is treated as taxable employment compensation by the IRS. Scholarships and grants you receive, however, aren’t taxable, provided you’re a degree candidate at the school you attend.
If no one else claims you as a dependent on their taxes, such as your parents, you may be able to get some money back by claiming the American opportunity credit for some of your school expenses.
- Internal Revenue Service: Publication 525 - Taxable and Nontaxable Income
- Internal Revenue Service: Publication 501 – Exemptions, Standard Deduction, and Filing Information
- Internal Revenue Service: Form 1040
- Cornell University Law School: 26 U.S. Code § 6501 - Limitations on Assessment and Collection
- Estrella Mountain Community College: FAFSA Tips and Common Mistakes to Avoid When Applying for Student Aid
- Internal Revenue Service: Publication 970 - Tax Benefits for Education
- Internal Revenue Service: Publication 596 - Introductory Material
- Internal Revenue Service: Publication 554 - 2016 Filing Requirements