What is Filing a Tax Return?
Every year Americans file tax returns (Form 1040 or one of the forms many variants) by April 15th. The purpose of filing the form is to show the Government how much your Tax Liability was for the previous calendar year (see “Tax Refunds Pt 1 – What is Tax Liability” article). Once all the numbers have been crunched, you send the form electronically or in the mail to the Internal Revenue Service (IRS).
What goes on a Tax Return
The following is a summary of the major components that go on a tax return:
- Your information (your name, spouses name, dependents, and filing status)
- How much you earned in wages, interest from savings/investments, and other forms of income or adjustments to income.
- Deductions based upon your filing status or Itemized Deductions such as home mortgage interest, charitable donations, and property taxes paid.
- Other deductions such as a portion of dependent care expenses, child tax credits, and retirement savings contributions.
- Payments such as taxes already sent (withheld) to the IRS and other refundable credits.
- How much you over-withheld or should get back in the form of a refund.
With all these variables, it is very difficult to predict with 100% accuracy what your “Tax Liability” was until you file your return. Ultimately this will result in you asking yourself the question “do I get a refund or do I owe?”
I have a goofy way of explaining this: Completing a tax return is like balancing a checkbook for someone who does not track their expenses – there are a few additions, a bunch of subtractions, and you hope there is a positive balance at the end of it all.
Be prepared to prepare:
The greatest tip I can offer to be ready when it is time to file your taxes is keep your receipts, documents, and income statements organized. It will make your life SO much easier. The tax code has become so complicated and with so many variables (deductions, adjustments, credits) that we have an entire industry dedicated to preparing tax returns (CPAs, H&R Block, Jackson Hewitt, Liberty, etc…) because the average American just can’t keep track of it all without some assistance. Be purposeful with your documents/receipts throughout the year in a file drawer or safe storage area.
How long to keep records:
A rule of thumb is keep your tax records for 7 years. However, the IRS.gov website states: “You must keep your records for as long as they are important to federal tax law“. It also states to keep W-2 (year-end statement from your employer) until you begin receiving Social Security benefits. Ugh.
The next article, “Tax Refunds: Part 4” we will discuss what a tax refund really is.
Tax Refund History
Note: If you are at all interested in seeing what a federal tax return from 1913 looked like then visit http://www.taxhistory.org