What Is a Tax Return?
A tax return is a form or form filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes. In most countries, tax returns must be filed annually for an individual or business with reportable income, including wages, interest, dividends, capital gains, or other profits.
Understanding Tax Returns
In the United States, tax returns are filed with the Internal Revenue Service (IRS) or with the state or local tax collection agency (Massachusetts Department of Revenue, for example) containing information used to calculate taxes. Tax returns are generally prepared using forms prescribed by the IRS or other relevant authorities.
In the U.S., individuals use variations of the Internal Revenue System’s Form 1040 to file federal income taxes. Corporations will use Form 1120 and partnerships will use Form 1065 to file their annual returns.
A variety of 1099 forms are used to report income from non-employment-related sources. Application for automatic extension of time to file U.S. individual income tax return is through Form 4868.
Typically, a tax return begins with the taxpayer providing personal information, which includes their filing status, and dependent information.
What Documents Do I Need to Keep for My Tax Returns?
For accurate tax filing, it’s crucial to retain various documents such as W-2s, 1099s, and receipts for deductions. These documents serve as evidence of your income, expenses, and eligibility for tax credits.
The Sections of a Tax Return
In general, tax returns have three major sections where you can report your income, and determine deductions and tax credits for which you are eligible:
Income
The income section of a tax return lists all sources of income. The most common method of reporting is a W-2 form. Wages, dividends, self-employment income, royalties, and, in many countries, capital gains must also be reported.
Deductions
Deductions decrease tax liability. Tax deductions vary considerably among jurisdictions, but typical examples include contributions to retirement savings plans, alimony paid, and interest deductions on some loans. For businesses, most expenses directly related to business operations are deductible.
Taxpayers may itemize deductions or use the standard deduction for their filing status. Once the subtraction of all deductions is complete, the taxpayer can determine their tax rate on their adjusted gross income (AGI).
Tax Credits
Tax credits are amounts that offset tax liabilities or the taxes owed. Like deductions, these vary widely among jurisdictions. However, there are often credits attributed to the care of dependent children, individuals aged 65 or older, or those with permanent and total disability. Note that there may be income limitations or restrictions to these credits.
After reporting income, deductions, and credits, the end of the return identifies the amount the taxpayer owes in taxes or the amount of tax overpayment. Overpaid taxes may be refunded or rolled into the next tax year.
Taxpayers may remit payment as a single sum or schedule tax payments periodically. Similarly, most self-employed individuals may make advance payments every quarter to reduce their tax burden.
The Bottom Line
A tax return is a document filed with the tax authorities that reports income, expenses, and other relevant financial information to calculate and pay taxes. It is recommended to keep tax returns for at least three to seven years to comply with potential audit requirements and the period of limitations for tax amendments.
