Tax is the money paid by citizens and businesses to the government so that they can make roads, build and maintain public parks, fund the army, provide policing, offer schooling and education, and more.
Have you ever wondered how the U.S. government decides how much tax each individual must pay? The government’s staff don’t go knocking at everyone’s door to examine our finances and then calculate our tax duty. No, in fact, we do the job ourselves — through a tax return.
So, what is a tax return, exactly?
This article will introduce you to the tax return definition, give an overview of its three main sections, and answer the most frequently asked questions about this financial matter.
Tax return definition
A tax return, also known as a tax report, is a form or a set of forms issued by the government which you fill in to report your income, expenses, and other financial information. When you complete your tax return, you’ll know if you owe any money to the government and how much to pay. In the case that you overpaid your taxes, you can also request a refund by filing the tax return.
The three main sections of a tax return
Typically, a tax return consists of the following three sections:
The income section lists all your income sources, such as wages, salaries, dividends, self-employment income, and royalties. If you’re an employee, your income will be recorded in a W-2 form provided by your employer.
Deductions, also known as tax write-offs, lower your tax liability, which essentially means the more deductions you claim on your tax return, the less tax you’ll have to pay. Just be aware and make sure you only claim deductions that you’re eligible for.
Some typical deductions for individuals that you may be able to claim are interest paid on your mortgage or your student loans, charitable donations, and contributions to your retirement saving plans. For business owners, you can claim tax deductions for most expenses involved in business operations.
Taxpayers can either take a standard deduction or itemized deductions. For those who opt for the former method, the standard deduction for the tax year 2022 is $12,950 for single filers, $25,900 for joint filers, and $19,400 for heads of households. The deduction amount may increase slightly each year to keep up with inflation. On the other hand, if you use itemized deductions for your tax return, you choose from various individual tax deductions rather than taking a fixed deduction amount.
Many people get confused between tax deductions and tax credits, so here is the key difference: deductions are subtracted from your taxable income while credits are subtracted directly from your total tax bill. For example, a tax credit of $1,000 will result in a $1,000 reduction in your tax bill. On the other hand, a $1,000 tax deduction lowers your taxable income (the amount of money you have to pay taxes on) by $1,000. So, if you are in the 22% tax bracket, a $1,000 deduction would save you $220.
Tax credits cover a wide range of expenses and situations: you can get tax credits if you purchase solar panels for use in your home, or for child-dependent care and education credits, etc.
Who has to file a tax return?
While most U.S. citizens and permanent residents who work in the United States need to file a tax return — not everyone must do it. Whether you have to file a tax return depends on your age, filing status, income level, and source of money.
To find out if you need to file a tax return this year, check out this detailed guideline from the IRS (Internal Revenue Service): Publication 501 (2021), Dependents, Standard Deduction, and Filing Information
What happens if I make a mistake on my tax return?
If you filed your tax return incorrectly or failed to include something, you need to notify the IRS. To do so, you would need to file an amended return with the IRS using Form 1040-X. You can file it yourself or have a professional prepare it for you. If you don’t inform the IRS of these mistakes yourself, you could face financial penalties and pay interest.
How can I track my refund?
You can use the IRS Where’s My Refund? tool or call the IRS directly at 800-829-1954 to check on the status of your refund 24 hours after you e-file. The IRS will give you an exact refund date once your tax return and refund are approved.
You’ll likely receive your refunds in less than 21 days.
Understanding the definition of “tax return” and how it’s calculated will help you become more confident in dealing with this important financial process. As a result, you’ll gradually learn how to file your tax return quicker and more accurately.
A great tip for everyone who wants to streamline their tax return filing process is to have your receipts organized. Receipts help you record transactions correctly and serve as concrete evidence for your deduction claims. It might be too much of a task to do yourself — and that’s where Shoeboxed comes in.
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