What is a Tax Return
A tax return is a form(s) filed with a taxing 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 over-payment of taxes. In most countries, tax returns must be filed annually for an individual or business with reportable income (e.g., wages, interest, dividends, capital gains, or other profits).
BREAKING DOWN Tax Return
In the U.S., individuals use variations of the Internal Revenue System's Form 1040. Corporations will use IRS Form 1120 and partnerships will use Form 1065 to file their annual returns. Reporting of investment income is through IRS Form 1099.
Typically, a tax return begins with the taxpayer providing personal information, which includes their filing status, and dependent information.
Three Sections of a Tax Return
- The income section of the tax return lists all sources of income. The most common method of reporting is a W-2 tax form. Wages, dividends, self-employment income, royalties and in many countries, capital gains must also be reported.
- 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 may determine their tax rate on their adjusted gross income.
- 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 and seniors, pensions, education and many more.
After reporting income, deductions and credits, the taxpayer ends their tax return. 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 on a periodic basis. Similarly, most self-employed individuals may make advance payments every quarter to reduce their tax burden.
In the United States, the IRS recommends that filers retain tax returns for at least three years. However, other factors may require more prolonged retention. Some situations may require indefinite retention of filed returns. If a tax return contains errors, an amended return should be submitted to correct the discrepancy.