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Post: Understanding Social Security: Do I need to file a tax return if most of my income is Social Security?

Recently we received the following email from a reader:

I would like to know if I live off my Social Security check and have no other income must I file a federal tax return? I have a yearly income of $21,000. My living and medical expenses takes up most of that. I really appreciate any advice you can give me on this matter.

The short answer is “probably not”. But of course, there are always mitigating circumstances for each situation, so it pays to look more closely into this to qualify the answer.

As long as the only income that the individual receives is from Social Security and there is no tax withheld from those payments, most likely filing a tax return is not necessary. But there may be other matters at work that might require (or behoove) you to file a tax return anyhow.

If you have had any tax withheld, either from the Social Security payments, or from any other source, including quarterly estimated tax payments or carried over refunds from prior years, you should file a tax return. In many cases you’ll get most if not all of the withheld tax back in a refund.

If you were due an Economic Impact Payment in 2021 but didn’t receive it, filing a tax return will enable you to claim this payment as a Recovery Rebate Credit.

If you are married and your spouse receives income from another source (besides Social Security), you likely need to file a tax return based on that other income. Don’t forget that this includes any taxable sales of investments (reported on Form 1099B) as well as interest and dividends (reported on Forms 1099INT and 1099DIV, respectively).

Read more about Social Security on MarketWatch

When you have tax-exempt income, including municipal bonds or U.S. savings bond interest, these sources are often overlooked but are important in calculating the possible inclusion of your Social Security benefits as taxable. You can use the tool available from the IRS — Are My Social Security or Railroad Retirement Tier I Benefits Taxable?–to help you determine whether your Social Security benefits are taxable based on your other income.

The reader indicates no other income, but if you happen to be employed and/or you have self-employment income, it’s most often necessary to file a tax return to reconcile your withholding against the tax on your income. Often self-employment tax is overlooked in these situations.

In addition, if you’re the dependent of someone else or someone else is your dependent, there may be complications with your income that could require filing a tax return.

If you or anyone on your tax return (spouse or dependents) has health insurance coverage through an Affordable Care Act Marketplace (such as Healthcare.gov), then filing a tax return is a necessary matter, in order to reconcile any premium adjustments and credits to you. If these dependents qualify, you might also be eligible for child tax credits or other dependent credits, which would only be available if you filed a tax return.

Earned income credit might also be available to you depending on your circumstances — and you can only receive this credit if you file a tax return.

If you have used a Health Savings Account to pay for medical expenses in the past year, you’ll need to file a tax return to account for those withdrawals against your qualified medical expenses.

There are a few other instances that might necessitate a tax return, including Roth conversions, as an example. Plus, if you were subject to an IRMAA surcharge on your Medicare premiums in a previous tax year, it might be worth your while to file a tax return to have that proof of the reduced income, even if you don’t owe any tax on the return.

If you’re unsure about whether you need to file a tax return, the IRS has an interactive tool that you can use to help you determine whether it is necessary to file. Just go to Do I Need to File a Tax Return? on the IRS website to get started.

Readers, do you have a Social Security question? Email us at HelpMeRetire@marketwatch.com and we may use your question in an upcoming column.

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