Determining if a Return Should be Prepared

The filing threshold is $5 for MFS returns and for MFJ returns where the taxpayer and spouse were separated as of December 31.
If filing MFJ, and either (a) the taxpayer did not live with the spouse on December 31, or (b) the spouse died during the tax year and two lived apart on the date of death, then the filing threshold is $1 of gross income.

“Lived apart” means in separate households, not a temporary absence, such as being in a hospital.

If the taxpayer received a Form 1099-S, the taxpayer must file to report the sale, even if there is no tax due or other filing requirement.

CA process note: A dependent may have no federal filing requirement but still be required to file a CA return. For 2023, if a dependent had income of more than $5,363 ($10,726 if filing MFJ, HoH, or QSS), then the dependent must file a CA return (and a federal return should also be prepared, since the CA return uses federal tax information as its base).

However, if unearned income is greater than $350, then there is still a filing requirement if total income is greater than $1,100.

Chart D of Pub 4012 (tab A) lists who would benefit from filing, even if they have no filing requirement. The most common situations are:

To get a refund of federal and/or state income taxes withheld (for example, a return done for a dependent, who had taxes withheld on Form W-2)
To get an income-based refundable credit: federal EIC, American Opportunity Credit, etc.
CA process note: For tax year 2023, a taxpayer with some earned income, either age 18-24 or age 65 or older, but without dependents, is not eligible for federal EIC, but is eligible for the refundable CalEITC if their (federal) AGI is less than $30,950. If so, they should file.

If the taxpayer has no taxable income – that is, AGI would be zero or even negative, but the taxpayer needs a tax return for legal or governmental reasons, or wants to file for any reason, including concerns about identity theft, then an adjustment is required so that the return can be e-filed; enter $1 as taxable interest, with the description “To enable efiling” or simply “Bank”.
If a taxpayer does not file a return, record the taxpayer as a Q&A on the daily Activity Log.
For taxpayers who must file and who have one or more dependents old enough to work, ask about any earned income for the dependent(s). The dependent(s) may also be required to file (see page A-4 of Pub 4012).
For taxpayers who must file and who have one or more dependents of any age, ask about any unearned income (typically interest, dividends, and/or capital gains) of the dependents.

A child under the age of 18, or under the age of 24 and a full-time student, is subject to the “Kiddie Tax”. [Unearned income includes all taxable income other than earned income: taxable interest, pension and annuity income, etc. “Unearned income” for the purpose of the “Kiddie Tax” also includes taxable scholarship and fellowship grants not reported on a Form W-2.]
Beginning with the 2018 tax year, because of changes in tax law, a dependent’s return became in-scope on the federal return even if the limit for unearned income ($2,500 for 2023) was exceeded.

CA policy: Because California rules do not conform with the 2018 federal tax law change, the dependent’s tax return remains out-of-scope if the $2,500 limit is exceeded. The taxpayer needs to use a paid preparer or tax-preparation software to file the dependent’s return.