Your Guide to Understanding Tax Returns
Taxes can be a dreaded word for anyone. It makes it much harder when we not understand our taxes. Here is your guide to understanding tax returns.
Confused about taxes? As it turns out, you’re not alone. In fact, recent research reveals that over half of Americans don’t feel confident about their understanding of tax laws or the tax code.
Understanding tax returns may seem like a foreign language, but it’s important to understand where your money is going- and how it’s being used.
Let’s get into what you need to know!
What Is a Tax Return?
A tax return refers to the form filed by a taxing authority that reports your income, expenses, and other relevant tax information.
Your tax return enables you, the taxpayer, to estimate your tax liability, request refunds for overpayments, and schedule future payments.
In America, tax returns are free filed annually for both individuals and businesses that generate reportable income (such as employment wages, dividends, capital gains, or interest).
Tax Return Structure
There are a few sections in a tax return, and it’s essential that taxpayers understand each of them thoroughly.
Income Section
The income section essentially outlines all the sources of income accrued over the year. In a typical employment setting, employees receive a W-2 tax form. However, there are many other different income forms you can receive based on different income methods (such as self-employment income, royalties, and capital gains).
Deductions
Deductions reduce your tax liability and basically help to lower the overall amount of taxes you owe. There are a variety of different deductions available.
For example, contributions to tax-advantaged retirement savings plans, such as a 401(k) or Roth IRA are eligible for deductions. Yes, the government may reward you for saving money! Talk about a win-win.
If you own your own business, most of the expenses related to your business operations are also deductible.
Tax Credits
These refer to various figures that also offset tax liabilities. They work similarly to deductions, and they vary state by state. Tax credits can be provided for caring dependent children or senior citizen; they can also be used for funding education.
Your tax returns consist of your income, deductions, and credits. The end of the return identifies the total amount the taxpayer owes in taxes or the amount of tax overpayment for the year.
Safekeeping of Tax Returns
The IRS recommends that all tax filers keep their tax returns for at least three years. However, this is just a general suggestion, and other extraneous variables may require holding onto them even longer.
If your tax returns contain errors, you will need to provide an amended return to correct the mistake. You should then hold onto your records for three years from that date.
Remember this: it’s better to hold onto your returns and not need them than for the opposite to happen!
Final Thoughts on Understanding Tax Returns
Whether you like taxes or not (and does anyone love paying them?), they are an essential part of American society. Understanding tax returns will help you feel more empowered come filing time.
Interested in learning more about your financial well-being? Be sure to check out our blog today!