Break-Even Point
If you earn below a certain threshold each year, it’s possible that you won’t have to pay federal income tax.
The exact amount you can earn before paying taxes depends on a number of factors, including your gross income, your age, dependency and filing status. In 2019, any single person below the age of 65 who earned less that $12,000 was exempt from paying federal income tax.
Whether you fall into the exempt category or not, it’s still advisable to file a tax return, just to ensure your records are kept right up to date.

How Does Tax and Tax Exemption Work?

The US operates on a “progressive tax system”. In simple terms this means that the more you earn, the more tax you pay. If your income remains below a given annual threshold, you are exempt from paying tax.

Who Needs to File a Tax Return?

Although it is always advisable to file tax returns, it is only considered an obligation if you meet certain criteria. The following groups must file tax returns:
  • Anyone who is single, aged under 65, who is not blind, if their unearned income (income derived from things like dividends and interest) is greater than $1,050, if their earned income is greater than $12,000, or if their gross (earned plus unearned) income was greater than the larger of $1,050 or, for earned income, up to $11,650 plus $350.
  • Anyone who is single, aged 65 years or above, or who is blind, if their unearned income is greater than $2,650, or if their earned income was greater than $13,600.
  • Couples or the blind, aged 65 or over, if their unearned income is over $4,250 or their earned income is above $15,200.
  • Married couples younger than 65 and not blind, with unearned income over $1,050 or earned income over $12,000, or if their gross (earned plus unearned) income was greater than the larger of $1,050 or, for earned income, up to $11,650 plus $350.
  • Married dependents who are 65 or older (or blind) when their gross income is above $5 (if the spouse itemizes deductions), whose unearned income is over $2,350 ($3,650 if both are over 65 or blind), whose earned income is $13,300 ($14,600 if both are over 65) or whose gross income is greater than $2,350 or earned income is greater than $11,650 plus $1,650 ($3,650 and $2,950 respectively if both aged over 65 or blind).

What About the Tax Rules for Small Businesses?

The rules for businesses are different to those for individuals. Whether your small business makes a profit or a loss you are still required to pay tax on your income. Which kind of return you need to file depends on how you have structured your business. Sole proprietors, for example, would file a Schedule C along with their personal tax return.
Freelancers are required to pay self-employment taxes on any income greater than $400, to cover social security obligations and Medicare taxes.
If you’re a sole proprietor, you’ll also need to file a Schedule C, Schedule SE and IRS form 1040 if your income is above $400, as well as paying both state and federal income taxes, social security and Medicare for any employees you might have.

I Want to Reduce my Taxable Income – What can I do?

There are several options available to you if you want to reduce your taxable income. Paying more into your retirement savings via IRAs and 401(k)s is one way. Another is to contribute extra to a Flexible Spending Account or Health Savings Account.
Remember though: even if you manage to reduce your income below the allowable threshold using any of these methods, you will still need to file your taxes in order to qualify for a refund.

Jeff Liebov Billwaze

Jeff Liebov is the CEO & Founder of BILLWAZE. Jeff envisioned a simpler way out of the complicated world of accounting apps and created BILLWAZE. As a tool, BILLWAZE makes things easy for those who want to get things done fast, without all the hassle. Jeff and the team are continuously improving the platform and are passionate about making the entire billing process simpler than ever.

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