Why File a Tax Return Even If You Don’t Have To?
Even if you aren't required to file taxes, submitting a return can be a strategic financial move that provides both immediate and long-term benefits.
The Internal Revenue Service (IRS) establishes annual gross income thresholds that determine whether an individual is required to file a federal tax return. These thresholds vary based on factors like filing status and age. Many people whose income falls below these levels may assume there is no reason to engage with the tax system for that year. However, this can be a missed opportunity, as filing a tax return offers several benefits even when not legally required.
Recovering Withheld Income Tax
One of the most direct advantages of filing a tax return is to recover money that has already been paid to the government. When an individual works for an employer, that employer typically withholds federal income tax from each paycheck based on information provided. This process is an estimate, and for many low-income earners, the total amount withheld can exceed any tax they might actually owe.
Consider a student who works a part-time job. Their earnings for the year might be under the IRS filing threshold, but their employer likely withheld income tax. Without filing a tax return, this withheld money remains with the U.S. Treasury. The only way to reclaim these over-withheld funds is to file a return, which reconciles the tax withheld with the actual tax liability, generating a refund for the difference.
Claiming Refundable Government Credits
Beyond getting back money already paid, filing a tax return opens the door to receiving government funds through refundable tax credits. Unlike nonrefundable credits, which only reduce a tax liability to zero, refundable credits can result in a cash payment even if you owe no tax.
A prominent example is the Earned Income Tax Credit (EITC), a benefit for working people with low-to-moderate incomes. The EITC is calculated based on income and the number of qualifying children and can result in a substantial payment. The Child Tax Credit (CTC) also has a refundable component, known as the Additional Child Tax Credit, allowing eligible families to receive a payment even if their tax liability is less than the full value of the credit. Similarly, the American Opportunity Tax Credit (AOTC) helps offset higher education costs, and a portion is refundable, meaning a student with little income could receive money back by filing a return.
Establishing an Official Financial History
Filing a tax return creates an official, government-verified record of your income for a given year. When applying for a loan, such as a mortgage to buy a home or financing for a car, lenders almost always require copies of recent tax returns to verify income. Without this history, securing credit can be significantly more challenging. Landlords may also request proof of income when evaluating a rental application, and a tax return serves as a credible source.
This official record extends to long-term benefits as well. The Social Security Administration (SSA) uses the income information reported on tax returns to calculate an individual’s future retirement and disability benefits. For self-employed individuals, filing a tax return is the primary way to log their earnings and accrue credits toward Social Security. Failing to file can lead to an incomplete earnings record and, consequently, lower benefit payments.
Starting the Statute of Limitations Clock
Filing a tax return provides a protective benefit by initiating the statute of limitations for an IRS audit. Generally, the IRS has three years from the date a tax return is filed to assess additional taxes or begin an audit for that tax year. This three-year window is a period of certainty for the taxpayer, after which the IRS is typically barred from questioning the return.
If a tax return is never filed for a particular year, this three-year clock never starts. This means the IRS can, in theory, question a person’s financial situation for that year at any point in the future. By filing a return, even if no tax is owed, an individual formally closes the book on that tax year once the three-year period has elapsed.