Navigating the complexities of individual income taxation begins with understanding three fundamental concepts: filing requirements, filing status, and dependents. These elements are the cornerstones upon which individual tax liability is determined, shaping not only whether you must file a tax return, but also how your tax is calculated and what credits and deductions you may be eligible to claim. This chapter will delve into each of these crucial areas, providing a comprehensive overview of the rules that dictate who must file, the various filing statuses available, and the significance of claiming dependents in the context of U.S. Federal Income Tax.

Filing Requirements for Individuals

IRS source – Check if you need to file a tax return

Who Must File?

The U.S. federal income tax system operates on a principle of voluntary compliance, yet for many individuals, filing a tax return is not optional – it’s a legal obligation. Determining whether you are required to file a federal income tax return depends primarily on your gross income, your filing status, your age, and whether you can be claimed as a dependent on someone else’s return. These thresholds are not static; they are adjusted annually for inflation, so it’s crucial to consult the most current IRS guidelines each tax year.

General Filing Thresholds Based on Gross Income

For most individuals, the primary factor determining the filing requirement is gross income. The IRS sets specific income thresholds for each filing status. If your gross income for the tax year meets or exceeds the threshold for your filing status, you are generally required to file a federal income tax return. These thresholds are typically linked to the standard deduction amounts for each filing status.

Even if your gross income falls below the general filing thresholds, you may still be required to file a tax return in certain situations. These include, but are not limited to, when you:

• Are Self-Employed: If your net earnings from self-employment are $400 or more, you are required to file a tax return and pay self-employment tax (Social Security and Medicare taxes). This threshold is significantly lower than the general income thresholds.
• Have Special Taxes Due: You are required to file if you owe certain special taxes, such as:
  • Social Security and Medicare tax on unreported tips.
  • Household employment taxes (if you employ someone to work in your home and pay them wages exceeding certain thresholds).
  • Alternative Minimum Tax (AMT).
  • Recapture taxes (e.g., recapture of investment credit, or first-time homebuyer credit).
  • Taxes from certain retirement plans (e.g., early distributions).
• Received Advance Payments of Premium Tax Credit: If you received advance payments of the Premium Tax Credit (to help pay for health insurance purchased through the Marketplace), you must file to reconcile these advance payments and determine your actual credit amount.

Who Should File Even When Not Required?

Even if your gross income is below the filing threshold and none of the special situations apply, you might still want to file a tax return. The most common reason to file when not required is to claim a refund. You might be due a refund if:

• You had federal income tax withheld from your wages. If you worked and had taxes withheld from your paychecks (shown in box 2 of your Form W-2), you must file to get that money back if your tax liability is less than the withheld amount.
• You qualify for refundable tax credits. Certain tax credits are refundable, meaning you can receive a portion back as a refund even if you don’t owe any taxes. Examples include the Earned Income Tax Credit (EITC), the refundable portion of the Child Tax Credit, and the American Opportunity Tax Credit (partially refundable).

Filing Requirements for Individuals Claimed as Dependents

The filing requirements for individuals who can be claimed as dependents on another person’s tax return are different and generally more stringent. For dependents, the filing requirement thresholds depend on both their earned income and unearned income. Unearned income includes interest, dividends, capital gains, rents, royalties, taxable scholarships and fellowships, and certain distributions from retirement plans and social security benefits.

A dependent is generally required to file a tax return if they have:

• Gross income (combined earned and unearned) that exceeds the greater of:
  • $1,300, or
  • Their earned income up to the regular single standard deduction amount plus $450 (but not more than the regular standard deduction amount for single filers).

Filing Status

IRS source: Filing status

Filing status, as defined within the Internal Revenue Code, is a taxpayer classification based primarily on marital status and family situation, which dictates the tax rates, standard deduction amounts, and eligibility for various tax benefits. This classification, rooted in Internal Revenue Code Section 1 (IRC §1), determines several key aspects of your tax calculation, including:

• Tax Brackets: The income thresholds for each tax bracket vary by filing status. This means the same amount of taxable income will be taxed at different rates depending on your filing status.
• Standard Deduction: The amount of the standard deduction you can claim is set based on your filing status. Generally, Married Filing Jointly and Qualifying Surviving Spouse have the highest standard deductions, while Married Filing Separately and Single have the lowest. Head of Household falls in between.
• Eligibility for Credits and Deductions: Some tax credits and deductions have specific eligibility rules that are tied to filing status. Certain credits or deductions may be available only to certain filing statuses, or the amount you can claim may be limited depending on your status.

Taxpayers should always carefully consider all available filing statuses and choose the one that results in the lowest tax liability, provided they meet the eligibility requirements for that status. In some situations, such as for married couples, it may be beneficial to calculate their taxes under both Married Filing Jointly and Married Filing Separately to determine which status yields the better tax outcome. In essence, determining the filing status is a logical process that starts with your marital status and family situation, and then considers the specific criteria and tax implications of each available status to arrive at the most appropriate and often most advantageous choice.

Here’s a detailed look at each of the five filing statuses:

Single Filing Status

• Definition/Criteria: You are considered single for tax purposes if, on the last day of the tax year (December 31st), you are unmarried, divorced, or legally separated according to your state law. Widowed individuals may also qualify for Single status in certain circumstances (if they do not qualify for Qualifying Surviving Spouse status).

• Typical Situations:

  • Unmarried individuals who do not qualify for Head of Household status.
  • Individuals legally separated or divorced throughout the year.
  • Widowed individuals who do not qualify for Qualifying Surviving Spouse status.

Married Filing Jointly Filing Status

• Definition/Criteria: You are considered married for the entire year if you are married as of December 31st. For Married Filing Jointly, both you and your spouse agree to file a single tax return, reporting your combined income, deductions, and credits.

• Typical Situations:

  • Most married couples. It is usually the most advantageous option tax-wise for couples where one spouse earns significantly more than the other, or when both spouses have income.
  • Couples who wish to simplify their tax filing by combining their financial information.

Married Filing Separately Filing Status

• Definition/Criteria: You are married as of December 31st and choose to file separate tax returns. Each spouse reports only their own income, deductions, and credits.

• Typical Situations:

  • Couples who want to be legally married but prefer to keep their finances separate for tax purposes. This might occur in situations of marital discord or when one spouse wants to avoid being jointly liable for the other spouse’s tax obligations.
  • In rare cases, it might be beneficial if spouses are separated or in the process of divorce and want to file individually. However, it’s crucial to compare the tax outcomes with Married Filing Jointly and Head of Household (if applicable) to determine the most beneficial option.
  • When required by law in community property states to separately report community income and deductions, although even in community property states, joint filing is often still more beneficial.

Head of Household Filing Status

• Definition/Criteria: You can file as Head of Household if you are considered unmarried for tax purposes and pay more than half the costs of keeping up a home for a qualifying child or a qualifying relative who lived with you for more than half the year. You must also be a U.S. citizen or U.S. resident alien for the entire year.

  • Unmarried Status: For Head of Household, you must be unmarried, or considered unmarried. You are considered unmarried if you are legally separated or divorced, or if you are married and live apart from your spouse for the last six months of the tax year and file separately. Simply living apart does not automatically qualify you as Head of Household if you are still considered married under IRS rules.
  • Qualifying Child/Qualifying Relative Requirement: You must have a qualifying child or qualifying relative (as defined in the dependents chapter) living with you for more than half the year. However, for a qualifying child, you do not have to claim them as a dependent to qualify for Head of Household as long as they meet the tests to be your qualifying child. For a qualifying relative, you must be able to claim them as a dependent.
  • Paying More Than Half the Costs: You must pay more than half the costs of keeping up the home. These costs include rent, mortgage interest, property taxes, insurance, repairs, utilities, and food eaten in the home.

• Typical Situations:

  • Unmarried individuals with qualifying children living with them (single parents are common filers).
  • Unmarried individuals who support a qualifying relative (like a parent) in their home.
  • Married individuals who are considered “unmarried” under IRS rules (living apart for the last six months of the year, filing separately) and meet the other Head of Household criteria.

Qualifying Surviving Spouse Filing Status (Qualifying Widow(er))

• Definition/Criteria: You may qualify as a Qualifying Surviving Spouse if your spouse died during one of the two tax years preceding the year you are filing, and you meet all of the following tests:

  • You did not remarry before the end of the tax year.
  • You could have filed Married Filing Jointly with your spouse in the year your spouse died.
  • You have a qualifying child, stepchild, or adopted child who qualifies as your dependent for the year.
  • This child lived in your home for the entire year.
  • You paid more than half the cost of keeping up your home for this child.

• Typical Situations:

  • Widowed individuals with dependent children in the two tax years following the year of their spouse’s death, who meet all other criteria.
  • Provides a transition period for widowed individuals before they potentially revert to Single or Head of Household status (depending on their circumstances in subsequent years).

Dependents: Qualifying Children and Qualifying Relatives

IRS source: Dependents

The Internal Revenue Code (IRC) defines two categories of dependents: Qualifying Child (QC) and Qualifying Relative (QR).

Detailed Requirements for a Qualifying Child (QC)

To be considered a Qualifying Child, an individual must meet all six tests as defined under IRC § 152(c).

a) Relationship Test [IRC § 152(c)(2)]: The child must be the taxpayer’s:

• • Child: Son, daughter, stepchild. Legally adopted children [IRC § 152(f)(1)(B)] are always considered children of the taxpayer.
  • Sibling: Brother, sister, stepbrother, stepsister.
  • Descendant: Grandchild, niece, nephew (children of siblings, step-siblings, or half-siblings).
  • Foster Child: An individual placed with you by an authorized placement agency or court order is treated as your own child [IRC § 152(f)(1)(C)].

The relationship can be by blood, marriage, or adoption.

b) Residency Test [IRC § 152(c)(1)(B), IRC § 152(c)(4)]: The child must live with the taxpayer for more than half of the tax year.

• • “Principal place of abode” is the key concept. This is where the child lives most of the time. [Treas. Reg. § 1.152-1(b)]
    • Temporary Absences Exception [IRC § 152(c)(4)(B)]: Temporary absences due to special circumstances (education, illness, military service, vacation, business travel of taxpayer, or detention in a juvenile facility) are disregarded if it is reasonable to assume the child will return to the home after the temporary absence, and the home is the child’s principal place of abode.

c) Age Test [IRC § 152(c)(1)(C), IRC § 152(c)(3)]: The child must be:

• • Under age 19 at the end of the tax year, or
  • Under age 24 at the end of the tax year and a “student,” or
    • “Student” Definition [IRC § 152(f)(2)]: An individual who during any part of 5 calendar months in the year is:
      • Enrolled as a full-time student at an educational organization (maintains a regular faculty and curriculum and has a regularly enrolled body of students).
      • Pursuing a full-time, on-farm training course given by a qualifying educational organization or governmental entity.
  • Any age if “permanently and totally disabled.” “Permanently and Totally Disabled” Definition [IRC § 22(e)(3)] (referenced by IRC § 152(c)(3)(B)): Unable to engage in any substantial gainful activity due to a medically determinable physical or mental impairment which can be expected to result in death or to last for a continuous period of not less than 12 months.

d) Support Test [IRC § 152(c)(1)(D), IRC § 152(c)(5)]: The child must not have provided more than half of their own support for the calendar year.

• “Support” Definition [Treas. Reg. § 1.152-1(d)(2)]: Includes items such as food, lodging, clothing, medical and dental care, education, recreation, transportation, and similar necessities.
• Consideration of Funds Source: Funds provided by the taxpayer are support provided by the taxpayer. Funds used by the child, even from sources like their own earnings, gifts, loans, scholarships (unless specifically excluded by law), are considered support provided by the child. [Treas. Reg. § 1.152-1(d)(2)(i)]  
• Capital Items as Support [Treas. Reg. § 1.152-1(d)(2)(ii)(a)]: Capital items (like a car) can be support if they are actually used for support (transportation needs). 

e) Joint Return Test [IRC § 152(c)(1)(E), IRC § 152(b)(2)]: The child cannot file a joint return with a spouse for the tax year.

• Exception [IRC § 152(b)(2)(B)]: A joint return filed solely to claim a refund of withheld tax where neither spouse is required to file a return is disregarded. Essentially, if they only filed to get back withheld money and wouldn’t otherwise need to file, this test is met.

f) Citizenship or Residency Test [IRC § 152(b)(3)]: The child must be a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico for some part of the calendar year.

Detailed Requirements for a Qualifying Relative (QR)

If an individual does not qualify as a Qualifying Child, they might still qualify as a Qualifying Relative under IRC § 152(d). All five tests must be met:

a) Not a Qualifying Child Test [IRC § 152(d)(1)(A)]: The person cannot be the Qualifying Child of any taxpayer for any tax year beginning in the same calendar year as the taxpayer’s tax year. This is often referred to as the “Superior Claim” rule – a QC claim always “beats” a QR claim.

b) Gross Income Test [IRC § 152(d)(1)(B)]: The dependent’s gross income for the calendar year must be less than the gross income amount for the exemption amount under IRC § 151(d)(1). This amount is indexed for inflation annually (e.g., $4,700 for 2023; students must always check the current year’s amount).  

• • “Gross Income” Definition [IRC § 61] (and related regulations): All income from whatever source derived, unless specifically excluded by law. This includes money, property, and services. Examples: wages, interest, dividends, rents, business income, taxable Social Security benefits (if any portion is taxable – see IRC § 86).

Exempt Income Excluded: Items like tax-exempt municipal bond interest, certain Social Security benefits (if not taxable under IRC § 86) are not included in gross income for this test.

c) Support Test [IRC § 152(d)(1)(C), IRC § 152(d)(3)]: The taxpayer must provide more than half of the dependent’s total support for the calendar year.

• “Support” Definition: Same definition as for the Qualifying Child Support Test (food, lodging, clothing, etc.).
• Total Support Calculation: This is about the total support the person received from all sources. The taxpayer must contribute more than half of this total. This is different from the QC Support Test, which focused on whether the child provided more than half of their own support.
• Multiple Support Agreements [IRC § 152(d)(3)]: If no single person provides more than half the support, but a group collectively does, and other conditions are met (see chapter section on Multiple Support Agreements), a multiple support agreement can allow one person in the group to claim the QR.

d) Relationship Test or Household Member Test [IRC § 152(d)(2)]: The person must be either:

• • Related to the Taxpayer in a specific list of relationships defined in IRC § 152(d)(2)(B) (child, sibling, parent, in-laws, aunt/uncle, niece/nephew, etc. – as detailed in the prior chapter section).
  • OR If not related, the person must live with the taxpayer as a member of the taxpayer’s household for the entire tax year. [IRC § 152(d)(2)(C)]
    • Important: If claiming based on relationship, the person does not have to live with you. If claiming based on household member, they must live with you for the entire year (not temporary absences exception here – the entire year).

e) Citizenship or Residency Test [IRC § 152(b)(3)]: Same as the Qualifying Child Citizenship or Residency Test: U.S. citizen, U.S. national, U.S. resident alien, or resident of Canada or Mexico for some part of the calendar year.

The process for determining if someone is your dependent should generally follow this order:

1. Is the person a Qualifying Child (QC) of you? Apply all the tests for a Qualifying Child (Relationship, Residency, Age, Support, Joint Return, Citizenship/Residency). If all QC tests are met for you, then the person is your Qualifying Child. You are done with the dependent determination process for this person in relation to you for QC purposes.

2. If the person is NOT a Qualifying Child of you, or if you are unsure: Consider if they are a Qualifying Child of any other taxpayer. If the person could be a Qualifying Child of another taxpayer (even if that other taxpayer doesn’t actually claim them), then they cannot be your Qualifying Relative. This is the “Not a Qualifying Child Test” for QR.

3. If the person is NOT a Qualifying Child of any taxpayer (or could not be): Consider if the person is a Qualifying Relative (QR) of you. Apply all the tests for a Qualifying Relative (Not a Qualifying Child, Gross Income, Support, Relationship or Household Member, Citizenship/Residency). If all QR tests are met for you, then the person is your Qualifying Relative.