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Tax Return – What are IRS Income Tax Returns?

What Is a Tax Return?

Tax ReturnA tax return is a declaration to pertinent tax authorities calculating net income.  The purpose is to determine if a further tax payment is necessary or if a refund can be expected.

A tax return is a formal statement, often submitted under penalty of perjury that is filed with a governing tax authority.  Typically, it records income, expenses, and other relevant tax information. Tax returns enable taxpayers to assess their tax liability, plan their tax payments, and receive refunds for overpayments. In most nations, an individual or business that has reportable income, such as wages, interest, dividends, capital gains, or other profits, must file an annual tax return.

IRS Federal Income Tax Return

In the United States, federal tax returns are filed with the Internal Revenue Service (IRS).  State or local tax returns are filed with the corresponding local or state tax collection agency. For example, in California, state income tax returns are filed with the State of California Franchise Tax Board.  Tax returns are generally prepared using forms prescribed by the IRS or other relevant authorities.

In the U.S., individuals and businesses use federal tax forms stipulated by the IRS.  For example:

  • Individuals – Internal Revenue Service’s Form 1040 to file federal income taxes.  Employers report employee wages to the IRS using a W-2 form.  A variety of 1099 forms are used to report income from non-employment-related sources.
  • Corporations – Corporations will use Form 1120 and
  • Partnerships – Partnerships will use Form 1065 to file their annual returns.
  • Time extension – Application for an automatic extension of time to file U.S. individual income tax return is through Form 4868

Tax Returns – How to Navigate

In general, tax returns have four major sections.  There are areas available to report your income, calculate deductions, and determine any tax credits for which you might be eligible:

Income

A tax return’s income section lists all sources of income. A W-2 form is the most common way employers report employee wages to the IRS.  Wages, dividends, self-employment income, royalties, and capital gains must all be recorded in many nations throughout the world.

Deductions

Deductions reduce your tax liability. Tax deductions vary greatly between jurisdictions.  Common examples include contributions to retirement savings plans, alimony paid, and interest deductions on certain loans. The majority of company expenses directly related to business operations are deductible. Taxpayers can itemize deductions or take the standard deduction depending on their filing status. Once all deductions have been subtracted, the taxpayer can calculate the tax rate based on their adjusted gross income (AGI).

Tax Credits

Tax credits are used to offset tax liabilities or taxes payable. These also vary greatly among jurisdictions. Credits are frequently assigned to the care of dependent children and elders, pensions, education, and a variety of other things.

Tax Calculation

The end of the return is where the amount of taxes owed or the amount of tax overpayment is determined. Overpayments can be reimbursed or rolled over to the next tax year. Taxpayers can make a single payment or arrange tax payments on a regular basis. Similarly, most self-employed individuals may make quarterly advance payments to lower their annual tax burden.

Types of Tax Returns

Individual Income Tax Return

The Individual Income Tax Return (ITR) is a form that must be submitted to the IRS or State Tax Authority. It comprises information on the individual’s income and the taxes that must be paid on it during the year.  Individual income tax is another term for personal income tax. This particular tax is collected on a person’s wages, salaries, and other sources of income. This is most often imposed at a federal and state level. Most people do not pay taxes on all of their income because of exemptions, deductions, and credits. The Internal Revenue Service (IRS) offers a number of income tax deductions and tax credits.  Taxpayers can use these to decrease their taxable income. A deduction decreases your taxable income and the tax rate used to calculate your tax.  A tax credit reduces your income tax by providing you with a greater refund of your withholding.

  • Deductions – The IRS provides tax breaks for medical expenditures, investments, and certain educational expenses. For example, if a person earns $75,000 and is eligible for $15,000 in deductions, his or her taxable income falls to $60,000 ($75,000 – $15,000 = $60,000).  This reduces the total amount of income that is subject to taxation.
  • Tax credits –  A tax credit is a dollar-for-dollar reduction of the income tax you owe.  These credits are designed to assist targeted taxpayers in reducing their tax obligation or amount owing. They are typically offered to middle- and low-income families. For example, if a person owes $15,000 in taxes but is eligible for $3,750 in credits, their tax liability is reduced to $11,250 ($15,000 – $3,750 = $11,250).

Business Income Taxe Return

Corporations, partnerships, self-employed contractors, and small enterprises all pay income taxes on their earnings. Depending on the structure of the business, either the corporation, its owners, or shareholders report their business income.  Then, they can usually their operational and capital expenses. In general, taxable business income is the difference between business income and the operating and capital expenses required to generate the income.

Tax Return – Frequently Asked Questions

What States don’t require income tax returns?

Personal income taxes are levied by the majority of U.S. states. However, there is no personal income tax in Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington, and Wyoming. Tennessee’s Hall tax, which taxed dividends and interest, was removed on January 1, 2021. New Hampshire does not have a state income tax, but residents must pay a 5% tax on any dividends or interest received. The state passed legislation in 2018 that would phase down the state’s 5% tax on interest and dividends on January 1, 2024. As a result, in 2024, the number of states with no income tax will increase to nine.

Why is it called a tax return?

Tax returns are actually tax declarations.  They are a set of forms or documents filed by an individual and sent to the government’s financial authorities.  The purpose is to declare his/her income so that the government can decide on this individual’s income tax.

How long should I keep my filed tax returns?

The IRS advises taxpayers to store their tax returns for at least three years. Other conditions, however, may require keeping them for a longer period. In some cases, filed returns should be kept indefinitely.  For example, if a tax return contains errors, an updated return must be filed to address the disparity.  The Internal Revenue Service (IRS) can supply you with copies of your most recent seven tax years’ tax returns. You can obtain copies by completing Form 4506 and attaching a $50 payment for each one. When the IRS receives your request, it may take up to 60 days to process it.

How do I file my own tax return?

You can file a tax return after filling it out by hand, using a tax software program, or by engaging a tax preparer or accountant.  Whichever method you choose, you must still obtain and provide the necessary information for someone to file it on your behalf.

Up Next: Stock Delta – What is Delta in Stocks and Options?

Stock DeltaThe term Stock Delta refers to a ratio measuring the rate of change in a stock option or derivative for every $1 increase in value of the underlying stock or security.

Delta is the ratio that compares the change in the price of a stock or other marketable security to the corresponding change in the price of its derivative. For example, consider a stock option that has a delta value of 0.45.  This means that if the underlying stock increases in price by $1 per share, the option will rise by $0.45 per share, all else being equal.  The value of the option’s delta is the first derivative of the option’s value with regard to the price of the underlying security. As a result, delta is frequently employed in hedging methods and is also known as a hedge ratio.

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