Income taxes are a fact of life in the United States. Most adults file both federal income tax returns and state income tax returns, although several states do not have income tax laws. Tax laws are complex, and figuring out taxpayer status, dependents, deductions and credits can be so difficult that many people use accountants to assist them. Even an individual earning very little money may still have to wrestle with this problem.
What Is Income for Tax Purposes?
A lot of words are used in casual conversation that have a different meaning in the law. Tax law is particularly noted for the very specific definitions it assigns to ordinary terms, including "income." A private individual may consider income as limited to wages, or money earned through work. The taxing authorities define it much more broadly.
Under the tax laws, income tax is a charge imposed by the government on the annual gains of a person derived through work, business pursuits, investments, property dealings or other sources determined under the Internal Revenue Code or state law. The IRS rules and regulations are particularly detailed, and state taxes usually piggy-back off federal filings.
Earned and Unearned Income for Tax Purposes
Earned income, for tax purposes, includes all the taxable income and wages an individual gets from working or from disability payments he receives because he cannot work. He earns income if he works for another person or a business who pays him a wage. He also earns income if he runs a business or farm himself . Taxable earned income includes all wages, salaries and tips, union strike benefits, long-term disability benefits and net earnings from self-employment.
Note that the income an individual earns from investments or property that is rented out is usually taxable. Royalties received from copyrights, patents, and oil, gas and mineral properties are also taxable as income. So is the fair market value of property received in barter transactions.
There are some types of pay that the IRS considers unearned income. These include interest income, child support received, Social Security benefits and unemployment benefits.
Filing Requirements by Income
Not everyone who earns a dollar must file a federal tax return. The IRS lists the minimum amounts a person must earn in order to trigger the requirement that she file a tax return. Those minimums are updated every year. They are different depending on whether the person is a single person, married and filing a joint return, married and filing separate returns or the head of a household, and depending on the person's age and whether she is claimed as a dependent by someone else.
For income earned in 2018, an individual would have to earn at least $12,000 to trigger the tax return requirement, assuming that she is not claimed as a dependent by another taxpayer and is under 65 years old. She does not need to file taxes unless her income exceeds:
- $12,000 (for a single filer).
- $18,000 (for someone filing as head of household).
- $24,000 (for someone who is married filing jointly).
- $24,000 (for a qualifying widower with dependent child).
What About a Dependent?
If an individual is claimed as a dependent, his filing requirement is different. For example, children who live with their parents and continue to receive at least half of their financial support from their parents are dependents. Older people can be dependents as well, if someone else supports them.
Different filing rules apply to dependents. A dependent under the age of 65 years old must file a return if he has unearned income (for example, interest income) exceeding $1,050 or earned income (for example, wages) over $12,000. A dependent who got both earned and unearned income must file a return if the two types of income total more than $1,050 or more than his total earned income, plus $350.