It’s October! This is for many tax return preparers a second filing season, given the large percentage of taxpayers who file extensions in April. IRS reports approximately 10 percent of all filers request a six-month extension until October, and most of those tax returns tend to be the most complex. This is not surprising, considering most taxpayers who are W-2 wage earners would tend to file their tax returns early, especially if a refund is expected.

My last post, in April, focused on timely filing and payment. It bears repeating that the penalty for late filing is substantially more punitive than the penalty for not paying on time. For this reason, even if full payment is not possible, it makes good financial sense to file by the due date, whether in April or extended to October, and pay as much as possible if there is a balance due. Effective October 1, 2022, the interest rate for noncorporate taxpayers increased to 6 percent, compounded daily (federal short-term rate plus 3 percent). It doesn’t take a calculator to see that unpaid tax balances can increase in a hurry.

As we are all aware, not everyone files a tax return each year. Some choose not to file because their income is below the level that would trigger a filing requirement. Others choose not to file because their records are not in order, or they are unable to pay (see the previous discussion), or they are living “under the radar.” However, there are several good reasons to file a tax return.

  1. For those who were eligible but did not receive a third stimulus check, or didn’t get the full amount, the missing payments may be recovered by filing a tax return and claiming the Recovery Rebate Credit.
  2. In addition to filing a tax return to get a refund of overpaid income taxes, a taxpayer may file to get a refund of excess Social Security taxes withheld. This can arise with multiple employers where total wages exceeded $142,800.00. A refundable tax credit is available to those who had more than $8,853.60 withheld in 2021.
  3. A tax return should be filed where a taxpayer died during the tax year, to notify the IRS of the death and to prevent future notices looking for missing tax returns. For businesses no longer in operation, final returns should be filed to notify the IRS as well as your local tax authorities.
  4. IRS has more than one method of notification of an address change, but filing a tax return may be the most effective way to get your new address into the system, to avoid missing important future correspondence.
  5. Filed tax returns may be needed for loan applications.
  6. Persons planning to file for bankruptcy protection must be in compliance with tax return filing requirements, so having returns on file can help smooth that process.
  7. Several “refundable” tax credits are available to those claiming them on a filed tax return. Refundable tax credits are payable even where no taxes have been paid in. These are dependent on income levels and other criteria. Even taxpayers with income as high as $438,000 may be entitled to claim one or more of these credits. Some of the most popular are:
    • Earned Income Credit - For low to moderate income earners, the credit can be as much as $6,728.00, depending on children, dependents, disability and other criteria
    • Child Tax Credit - Up to $3,600 per child depending on age.
    • Child and Dependent Care Credit - Up to 50 percent of care expenses; credit up to $16,000.
    • Premium Tax Credit - Credit for healthcare insurance premium paid for policies obtained through the marketplace.
    • Health Coverage Tax Credit - Credit for healthcare insurance premiums paid by certain workers who lost their jobs and some pre-retirees.
    • Sick and Family Leave - Credits may be available for COVID-related sick leave for self-employed persons and for persons who paid household employment taxes.
    • American Opportunity Tax Credit - Expenses for first four years of college, partially refundable credit worth up to $2,500 per student.

Each year the qualifications change, and IRS has online tools available to determine eligibility at www.irs.gov. The details of each person’s circumstances matter. The amounts of potential payments could be significant and may be worth looking into. A taxpayer qualified for one or more of these refundable credits should consider filing a tax return just to claim the credit(s), even if not otherwise required to file a tax return.

The decision whether or not to file a tax return each year is an important one for all of us, as well as for our clients. I recommend consulting a tax professional before letting a potentially important opportunity slip away.
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Disclaimer: The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information and content are for general informational purposes only.

Individuals’ cicumstances differ; readers of this article should contact their attorney and/or financial professional to obtain advice with respect to any particular legal matter.

Darren Larsen is an attorney specializing in tax controversies, bankruptcy and estate planning, and the national secretary of WIFS.