Modest-Income Elderly, Income Tax Return

As the Old Saying Goes: Better Safe than Sorry.

As you know, we spend a lot of time in this e-newsletter talking about tax return filing responsibilities. But not everyone is required to file. If a person's income falls below prescribed levels, he or she may not have to bother. However, as we'll explain, it may be a good idea to file even it it's not required.

Here are the general rules:

IRS filing requirements generally depend on a person's age, income and filing status (such as single, married filing jointly, married filing separately, head of household or qualifying widow or widower). The rules can be complex. The income amounts usually change every year due to inflation adjustments and are based on the standard deduction and personal exemption amounts.

Your tax adviser can tell you whether your loved one is required to file, but here are a few other guidelines:

• Individuals who are age 65 or older are allowed to have more income than younger taxpayers before they are required to file.
• In some cases, a person may have to file even if he or she has a modest income due to a financial transaction. For example, a person may have to file if he or she sold a home during the tax year.
• There are lower income thresholds if a person is claimed as a dependent on another taxpayer's return. Once again, these income thresholds are based on the standard deduction and personal exemption amounts for the year, as well as other factors.
• A tax return should be filed if a person's net self employment earnings exceeds $400.

Why It May Pay To File Even When It's Not Required

Let's say a person's gross income is low enough that he or she is not required to file Form 1040. However, it may be a good idea to file anyway. Here's why.

• A person may be due a refund for the year, for example because of the refundable earned income tax credit or the refundable dependent child tax credit.
• If a person has an overall capital loss for the year caused by investment losses, that loss can be carried forward to future tax years and offset otherwise taxable capital gains in those years. However, until the person files a return for the year, the IRS will have no way of knowing that he or she generated a tax-saving capital loss carryover this year.
• If a person has an overall net operating loss (NOL) for the year caused by business losses, he or she can carry the NOL back two tax years and possibly claim a refund. Alternatively, he or she can choose to carry the NOL forward to future tax years and offset otherwise taxable income earned in those years. As with the capital loss example above, until the person files a return, the IRS will not knowing that he or she generated a tax-saving NOL for the year.

Until a tax return for the year is filed, the three-year statute of limitations period for the commencement of an IRS audit won't start. So the IRS could decide to audit a person's tax situation five years (or more) from now, and hit him or her with a tax bill plus interest and penalties. By that late date, it can be tough to prove the person didn't actually owe anything for the year in question. In contrast, if you file a return showing zero federal income tax liability for the year, the IRS generally must begin any audit of the tax year within three years of the filing date. Once that three-year window closes, the tax year generally becomes history. Putting a tax year permanently in the past is almost always a good thing.

Your tax adviser can provide more information about the best way to handle filing tax returns for an elderly relative.