A tax return is a critical document prepared and filed with a tax authority annually. It outlines income, expenses, and other financial details to calculate tax liabilities, arrange tax payments, or seek tax refunds for any overpayments. Whether you’re an individual or running a business, it’s essential to grasp the significance and intricacies of tax returns to stay compliant and financially sound.
Key Takeaways
- A tax return is a form filed with a tax authority reporting income, expenses, and other financial information.
- Taxpayers use it to determine their tax liability, schedule payments, or request refunds.
- Filing tax returns annually is a requirement in most jurisdictions.
Understanding Tax Returns
In the United States, tax returns are chiefly filed with the Internal Revenue Service (IRS) or state and local tax agencies. These documents typically follow the formats prescribed by these entities. Individuals commonly use variations of the IRS Form 1040 for personal income taxes, while corporations and partnerships might file using Forms 1120 and 1065, respectively.
Various forms, such as the 1099 forms, are used to report income from sources other than employment. For those requiring more time to file, an Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (Form 4868) is available.
Typically, a tax return begins with the taxpayer providing personal information, including filing status and dependent details.
Pro Tip:
Consider keeping old tax returns as they might be needed by an insurance company or a creditor for reasons beyond IRS requirements.
The Sections of a Tax Return
Tax returns usually feature three main sections: Income, Deductions, and Tax Credits.
Income
Here, you list all sources of income. This often includes wages from a W-2 form, dividends, self-employment earnings, royalties, and capital gains. Each source must be accurately reported to calculate total taxable income.
Deductions
Deductions decrease your taxable income. Common deductions include contributions to retirement plans, alimony payments, and interest on certain loans. Both individuals and businesses can opt to itemize deductions or take the standard deduction to determine their adjusted gross income (AGI).
Tax Credits
Tax credits directly reduce the amount of tax owed and can substantially lower your overall tax bill. These vary widely but may include credits for dependent care, elderly or disabled individuals, among others. Certain credits might come with income limitations or other restrictions.
After documenting income, deductions, and credits, the tax return calculates the total tax due or any refund owed for overpayment.
Note:
You can fill out a tax return yourself, use tax software, or hire a professional. In 2024, the IRS announced a Direct File pilot for online tax submission, broadening options for taxpayers.
IRS and Record Retention
The IRS generally recommends keeping tax returns for at least three years, though certain circumstances may warrant longer retention. Situations like filing an amended return or not reporting significant income can extend the recommended retention period.
For safeguarding, maintain related documents like those proving income, deductions, or credits until the expiration of the limitation period for that return. Different rules pertain to federal and state records, so ensure you’re compliant with guidelines applicable to your situation.
Other Tax Return Uses and Retention
Loan Applications
Lenders often request copies of tax returns for verifying the financial information provided in loan applications. Multiple years might be required to assess stability.
Rental Applications
Landlords may ask for tax returns to evaluate an applicant’s financial responsibility, especially in income-restricted rental situations.
Financial Aid Applications
When applying for federal student aid (FAFSA), retaining tax returns for at least two years is advisable.
Government Assistance Programs
Keep tax returns for at least three years when applying for government assistance to ensure compliance and expedite benefits processing.
Opening Financial Accounts
Investment and financial account openings may require older tax returns to verify past and current financial status.
Personal Finance Planning
Financial planners may request historical tax returns to analyze earnings and plan for future financial stability, tax savings, and retirement.
What Documents Do I Need for My Tax Returns?
Keep significant documents like W-2s, 1099s, and receipts to provide accurate proof of income, expenses, and credits.
Bottom Line
A tax return is a fundamental document mandated by tax authorities to report pertinent financial data for tax assessment purposes. Retain tax returns for three to seven years to comply with audit potential and amendments.
Maintain both physical and accepted digital records of these documents to ensure preparedness for any requirement of proof in the future.
Related Terms: income tax, tax report, W-2 form, tax credits, adjusted gross income, IRS forms
References
- Internal Revenue Service. “1040 (and 1040-SR) Instructions”.
- Internal Revenue Service. “Instructions for Form 1065”.
- Internal Revenue Service. “Instructions for Form 1120”.
- Internal Revenue Service. “General Instructions for Certain Information Returns”.
- Internal Revenue Service. “About Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return”.
- Internal Revenue Service. “Topic No. 404 Dividends”.
- Internal Revenue Service. “Topic No. 409 Capital Gains and Losses”.
- Internal Revenue Service. “What Is Taxable and Nontaxable Income?”
- Internal Revenue Service. “Traditional and Roth IRAs”.
- Internal Revenue Service. “Instructions for Schedule A Itemized Deductions”, Pages 3, 8.
- Internal Revenue Service. “Publication 535, Business Expenses”.
- Internal Revenue Service. “Topic No. 501 Should I Itemize?”
- Internal Revenue Service. “Credit for the Elderly or the Disabled at a Glance”.
- Internal Revenue Service. “Credits and Deductions for Individuals”.
- Internal Revenue Service. “1040 (and 1040-SR) Instructions”, Pages 61-62.
- Internal Revenue Service. “Self-Employed Individuals Tax Center”, Selected, How Do I Make My Quarterly Payments?
- Internal Revenue Service. “Direct File”.
- Internal Revenue Service. “How Long Should I Keep Records?”
- Internal Revenue Service. “Topic No. 308 Amended Returns”.
