Even if your income for the year is below the requirements for filing a federal income tax return, it may be to your advantage to file a return.
Refund of tax withheld
If you worked and income tax was withheld from your pay, you may be entitled to a tax refund. If you worked in a state that has an income tax you may also be able to get a refund for state income tax withheld.
If you received unemployment compensation during the year and tax was withheld, you may be entitled to a refund. This would depend on the amount of other income you received. For example, if you received unemployment part of the year and worked part of the year, your total income may be below the filing requirements. But you may be able to receive a refund of all or part of the tax withheld from your unemployment compensation and your earnings from work.
Self-employed
If you worked on your own, your total income may be below the filing requirements. But you would have to file a return and pay the self-employment tax if your net earnings from self-employment were $400 or more. By reporting your self-employment earnings you will be accumulating credits to qualify for social security benefits when you retire.
Refundable credits
As indicated by the IRS, even if you are not required to file a return, you should file if you are eligible for any of the refundable credits. These include the earned income credit. If you had earned income either from a job or by working on your own, and your total earnings are below the maximum amount based on the number of children you have, you could qualify for this credit.
If you have a qualifying child, you may qualify for the child tax credit, which can reduce your tax by up to $1,000 for each child. If the credit is more than the amount of tax you owe, you could qualify for the additional child tax credit, which is refundable.
Other potential refundable credits include the adoption credit, the American opportunity credit, and the health coverage credit.
If you adopted a child you can claim a credit for eligible costs up to a maximum credit of $13,360.
The American opportunity credit is for the costs of the first four years of postsecondary education. The maximum credit is up to $2,500 per student and 40% of the credit is refundable.
The health coverage tax credit is available for certain individuals who receive trade adjustment assistance (TAA), alternative TAA, reemployment TAA, or pension benefit payments from the Pension Benefit Guaranty Corporation.
Although most taxpayers cannot claim a first time homebuyer credit for 2011, according to the IRS the credit is still available for members of the Armed Forced, other uniformed services, the Foreign Service, and certain employees of the intelligence community. The home must have been purchased before May 1, 2011. If there was a binding contract before May 1, 2011 and the home was purchased before July 1, 2011, the credit can also be claimed.
Sales of stock or other investments
If you sold stock or other investments you will receive a Form 1099-B. This information is also sent to the IRS. If you do not file a return to report your sales, the IRS may assume that the basis of the stock or other investment is zero, meaning that the entire amount you realized on the sale would be taxable. The IRS could send a notice for a tax adjustment.
Starting in 2011 brokers are required to report the cost or other basis of stock purchased in 2011 on Form 1099-B. But if the stock or other investment was purchased before 2011, the IRS will not have information on the basis. By filing a return and reporting the basis, the proceeds from the sale of the investment, and the resulting gain or loss, the transaction is clear to the IRS.
Sources:
Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
Publication 17, Your Federal Income Tax, IRS