A tax return is a form or collection of forms filed with a tax authority, such as the Internal Revenue Service (IRS) in the United States, which states income, expenses, and other pertinent tax information. This document provides the basis for the calculation of income tax or other taxes a taxpayer is liable to pay.
Key Components of a Tax Return
- Income: Total income received during the tax year, including wages, salaries, dividends, interest, and other forms of revenue.
- Deductions and Credits: Allowable reductions in taxable income and credits which can reduce the total tax liability.
- Expenses: Costs that can be claimed to offset income, thus reducing taxable income.
- Filing Status: Marital status and the number of dependents, impacting the amount of tax owed.
Types of Tax Returns
Several types of tax returns cater to different entities and situations:
Individual Tax Returns
Forms such as the IRS Form 1040 in the U.S., used by individual taxpayers to report personal income and calculate taxes owed or refunds due.
Corporate Tax Returns
Forms like IRS Form 1120, filed by corporations to report income, expenses, and calculate corporate tax liability.
Partnership Tax Returns
Documents such as IRS Form 1065, used by partnerships to declare income, deductions, and distribute income to partners.
Estate and Trust Tax Returns
Forms such as IRS Form 1041, which report income generated by estate and trust assets.
How Long Must You Keep Tax Returns?
General Retention Period
The IRS typically recommends that taxpayers keep their tax returns and related documentation for at least three years from the date the original return was filed or two years from the date the tax was paid, whichever is later.
Special Situations
- Underreported Income: If a taxpayer omits more than 25% of their gross income, they should maintain records for six years.
- Indefinite Retention: If a return is fraudulent or if no return was filed, retention is indefinite.
- Asset Records: For property records, retain documentation until the period of limitations expires for the year in which you sell or dispose of the property, usually three years after that year.
Examples and Practical Application
Example 1: Individual Taxpayer
John, an individual taxpayer, files his 2021 tax return on April 15, 2022. He should keep his tax records until at least April 15, 2025.
Example 2: Small Business Owner
Sue owns a small business and files her 2021 corporate tax return on March 15, 2022. She should keep her tax records up to March 15, 2025, provided there are no discrepancies or requirements for longer retention.
Comparisons
United States vs. United Kingdom
- U.S.: Generally retains tax returns for three years.
- U.K.: HMRC advises individuals to keep records for five years after the 31 January submission deadline of the relevant tax year.
Related Terms
- Tax Liability: The total amount of tax that must be paid by an individual or entity.
- Tax Deduction: Offset that reduces taxable income.
- Tax Credit: Direct reductions to tax liability.
FAQs
How can I store my tax returns securely?
What happens if I lose my tax return?
Can I dispose of my tax returns after the retention period?
References
Summary
A tax return is a crucial financial document required by tax authorities to determine your tax liability or the refund you are entitled to. Understanding the various types, key components, and the stipulations for retaining tax records ensures compliance and helps avoid potential legal issues. Being well-informed about these aspects aids in effective financial management.
By retaining your tax returns for the appropriate period, you can safeguard against audits, discrepancies, and other tax-related complications.
