Federal Income Tax Laws: An Overview

According to the IRS, federal income taxes are one of the primary sources of revenue for the U.S. government. Annually, American taxpayers gather all of their receipts and paperwork and set out to calculate their federal income tax return. Your tax return shows the amount you earned and paid in taxes, which serves as proof to the U.S. government that you have fulfilled your tax obligations for that year. They use this money to fund a variety of programs and services in support of Americans and to pay interest incurred from borrowing. 

Now, maybe you are just starting out on your tax journey, or you need to file last year and are wondering what happens. Follow along as we outline the requirements for federal income taxes and provide insight into the laws surrounding them. 

Do I Legally Have To Pay Taxes?

The short answer is yes. There are many myths on the internet that claim federal income taxes to be unconstitutional and, therefore, unnecessary. It's important to know that those claims are untrue and the IRS takes tax payments seriously.

The constitution (Section 8, Clause 1) states that Congress can collect taxes and was further amended on February 3rd, 1913, to specifically include income as taxable. Paying taxes on time and with accuracy is imperative to avoid criminal charges, penalty fines, and interest as mandated by the law.

Federal Income Tax Payment Requirements

Now that it is clear taxes must be paid, how do you know if you meet the requirements? Determining if you need to file federal income taxes depends on three factors: your gross income, filing status, and whether someone else can claim you as a dependent.

Gross Income: There is a minimum requirement for federal income tax based on your filing status and gross earned income. Gross income refers to your total earned wages before any taxes or deductions are taken out. If your gross income meets the minimum under your filing status, you must pay federal income taxes. 

Filing Status: 

The five different filing statuses are:

• Single: you would choose this status if you are unmarried or legally separated from your spouse.

• Married filing jointly: you are married, and both you and your spouse agree to file a joint return.

• Married filing separately: you are married, but you and your spouse agree not to file a joint return.

• Head of household: This status is a bit more involved. According to the IRS, three things are required for this filing status:

1. You are unmarried or considered unmarried on the last day of the year. 

2. You paid more than half the cost of keeping up a home for the year. 

3. A qualifying person (your child, for example) lived with you in the home for more than half the year.

• Qualifying Surviving Spouse: The year of death is the last year for which you can file jointly with your deceased spouse. Therefore, you would choose this status if your spouse passed away before the start of the year.

Dependent or Independent: A dependent is a qualifying relative of the taxpayer, such as a child, stepchild, parent, or sibling. Although a spouse cannot be considered a dependent, there is a possibility of claiming your partner as a dependent before marriage if they receive more than half of their support from you as the taxpayer.

There are some exemptions to the federal income tax requirements. For example, child support and workman's comp are considered tax-exempt. 

Minimum Gross Income Requirements

Are you curious about the lowest amount of income required to fulfill your federal income tax obligations? Below we have included a table based on your filing status and gross income. Gross income is total wages before taxes, or other deductions are taken out. If that number is equal to or above the number in the right column, you must pay federal income taxes in the United States. 

*Minimum gross income is calculated for taxpayers under 65 years old. If you are over 65, the minimum requirement increases. 

Filing Date (Tax Day)

Your federal income tax must be filed with the IRS by April 15th of each year. This date is known as tax day. You can submit your taxes before the due date. Any submissions after that date may result in interest and fines. If you file your taxes but do not pay the full amount, interest will accrue until the amount is paid in full or until the interest reaches 25%.

What Type of Income Is Taxed?

Two types of income can be taxed, earned and unearned income. Earned income is the type you make from an employer (or if you are self-employed). Examples include salary or hourly wages, pensions, unemployment, and business income. Unearned income is earned through passive earnings such as dividends from investments, other related investment income, and royalties (residual income). 

Does Social Security Count as Income?

Social security may count towards your federal income taxes if your total income is more than $25,000 as an individual or, for a married couple filing jointly, $32,000. If your income does not meet the minimum requirement, your benefits are not taxed. 

Your Social Security Benefit Statement (Form SSA-1099), which summarizes your benefits for the past year, should arrive by mail. The form can be used to determine whether or not your social security will be taxed. 

If you expect your income to exceed those thresholds, you can either make quarterly estimated tax payments to the IRS or have federal taxes deducted from your benefits.

Bitcoin & Other Cryptocurrency Requirements

For federal tax purposes, cryptocurrency is considered property; therefore, you must pay the appropriate taxes.

What Happens If I Don’t Pay Federal Income Tax?

If you fail to file your federal income taxes, you will face civil or criminal penalties. Each day the taxes are not paid, they can accrue interest charges and may even be sent to collections, impacting your credit and future returns.

Taxes that are filed but go unpaid will accrue interest at 0.5 percent of the tax owed for each month. This number will continue to increase until it reaches the cap of 25%. On top of the interest, the IRS may impose penalty charges, garnish your wages, put a lien on your house, or freeze your assets.

Taxpayers rarely get extensions to pay taxes without interest and penalties. It is better to work with the IRS and set up a payment plan to avoid penalties and interest and make smaller monthly payments. In cases where the taxpayer is facing severe hardship, they can file for a six-month extension through the IRS. 

Self Employment Tax Requirements

Self-employed individuals are required to pay estimated taxes quarterly, and file an annual return. The minimum gross income for a self-employed individual is $400 or higher. Failure to file a tax return will result in the individual not receiving credits for Social Security benefits such as retirement or disability. In this case, it is still possible for the IRS to pursue interest and criminal charges. 

Statute of Limitations on Failure to File

The IRS does not have a limitation on when they can pursue an unfiled tax return. Therefore, they are able to impose criminal charges or penalties as soon as they discover the missing taxes. For taxpayers who would receive a refund, your taxes must be filed within three years of the due date in order to receive the tax refund. In fact, according to the American Bar Association, for most cases where the taxes were filed, the IRS has three years to audit the filed taxes. 

Do I Need a Tax Attorney if I Didn’t Pay Federal Income Tax?

If you cannot pay your federal income taxes, a tax attorney is a great tool to help sort out your debt with the IRS and avoid criminal charges. An attorney can step in and communicate with the IRS on your behalf to negotiate an Offer in Compromise. An offer in compromise is a proposal made to the IRS to pay a smaller amount than what is originally owed as a way to settle the debt. If accepted, the agreed amount is paid, and the debt is considered settled. The resulting debt may be significantly less than you originally owed. An attorney may also be able to request an installment plan to pay the debt off in smaller increments to lessen the financial hardship. If you are struggling with IRS-related stress and debt, Expertise.com offers a directory of local tax attorneys that can assist you in resolving your issues and moving forward.