Tax return

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German tax forms Mantelbogen.JPG
German tax forms

A tax return is the completion of documentation that calculates an entity or individual's income earned and the amount of taxes to be paid to the government or government organizations or, potentially, back to the taxpayer. [1]

Contents

Taxation is one of the biggest sources of income for the government. There are two types of taxes—direct and indirect—which are both parts of the tax revenue. Tax revenue is the income gained by government from taxes that are levied on income, profit, goods and services, land revenue, ownership, and transfer of property, and other taxes. [2] Total tax revenue calculated as a percentage of GDP shows the share of the country’s output collected by the government through taxes. [3] Tax revenue is used by governments to grant sums of money to communities, the military, education, hospitals, and infrastructure. [4]

Tax returns are usually processed by each country's tax agency, known as a revenue service, such as the Internal Revenue Service in the United States, the State Taxation Administration in China, and HM Revenue and Customs in the United Kingdom. Citizens in Sweden, Denmark, Finland, and Iceland pay the highest taxes and also get the highest benefits from taxes such as free or low-cost healthcare, education, childcare, etc. Austria, the Netherlands, and Belgium also have high taxes. [5] In contrast, countries such as Saudi Arabia, Brunei, Monaco, the Cayman Islands, Bahamas, and Andorra are so-called tax havens. These countries only tax very specific types of wealth or income, have very low tax rates in general, or have no taxes at all. [6]

Tax schedule

In the United States, a tax schedule is a form that the Internal Revenue Service (IRS) requires taxpayers to fill out in addition to the tax return. It is a tool that reports and provides information about the additional calculations and other amounts stated in the tax return. [7] These generally include information on amounts such as mortgage interest, interest income or charitable contributions.

Tax schedules are used by both taxpayers and taxation authorities such as the IRS. Simple tax returns can be filed using the Form 1040 whereas complex tax returns additionally require a tax schedule to be completed with the tax return. There are different types of schedules such as Schedule A, Schedule B, Schedule C, Schedule D, Schedule EIC, and Schedule SE. Specific tax forms can be used by taxpayers or private entities that are required to report information on their tax liabilities, including income earners, businesses, and companies. [8]

Filling in the tax return

A person may have to fill in a tax return depending on circumstances, which are different in each country. Generally, a tax return does not need to be filed if an income does not exceed a certain amount of money, but other factors such as the type of income, age, and filing status also play a role. Occasionally, there may be situations where a person does not have to fill in the tax return, but will do so anyway to receive a tax refund from the state. [9]

A tax return is different from a tax refund. A tax refund will occur when an individual has paid money to the state exceeding the level of expected income tax. In contrast, a tax return is a form a person needs to fill in every year to report income, expenses, and other relevant information. A tax return, therefore, helps a person to deal with tax calculations and payments or understand if a tax refund is due. This will depend on whether a person has overpaid on taxes, or were late in paying previous tax returns. [10]

The difficulty of filling in a tax return varies from country to country, but governments try to help citizens in different ways. Many governments utilize electronic filling and payment systems that keep a record of a person's history of tax returns and refunds. Another notable change in recent years is that government bodies share the data with each other. Within several European nations such as Denmark and Sweden, governments already provide citizens with prefilled return forms, which a citizen would sign if accurate, and if not, can fix the error on their own or prepare returns themselves. [11] In Denmark and Sweden, 97% and 74% of taxpayers had their forms prefilled by tax authorities respectively in 1999. [12]

The length of the completion of a tax return depends on the country, but the world average is almost 232 hours. [13]

Constituents of a tax return

In many countries, the three parts of a tax return usually include the following parts:

Income: This part consists of all the sources of a citizen's revenue. In the United States, the most widely known method for detailing is a form W-2, obtained from an employer. Wages, salaries, dividends, and interest should likewise be considered as a source of revenue. [14] It essentially measures the gross income which is divided into five subparts as per income tax laws: Income from Salary, Income from House Property, Profits and Gains from Business Profession, Income from Capital Gains, Income from Other Sources. [15]

Taxable income: Taxable income refers to the portion of your income that is subject to taxation. It includes various types of income, such as wages, salaries, rental income, dividends, and business profits, after deducting any allowable deductions. In Australia, the concept of taxable income is central to determining the amount of income tax you are liable to pay. [16]

Deductions: Reasoning or deductions form taxable income that reduces tax liability. For organizations, most expenses specifically identified with business tasks are deductible. Examples of tax deductions include mortgage interests, student loan interest, contributions to saving plans for retirement etc. The taxpayers can either itemize their deductions or use the standard deduction depending on which deduction on taxable income is greater.

Taxpayers can use standard deductions which varies according to filing status, for example, for older taxpayers (65 and above), the standard deduction is higher. It can be filed using Form 1040 or Form 1040-SR. In case of itemized deductions, the receipts for items to be filed under it must be preserved and divided into categories. At tax time, the expenses are recorded on Schedule A and the audited receipts are held back. [17]

Tax credits: Tax Credits are incentives for taxpayers that reduce the amount of liability paid to government entities. Tax credits are more impactful than deductions because they directly reduce the amount of money owed. If a person has $500 in tax credits, and the tax owed is $500, the tax credits will reduce a person's liability to zero. Tax credits arise from multiple areas. For example, a person may receive a Child Tax Credit if they care for a child under the age of 13. Education expenses might be treated as a tax credit in some countries, such as the American Opportunity Tax Credit in the United States. [18] The AOTC can cover up to four years of a full-time student in a post secondary school. Depending on your income, you can earn up to $2,500 of the cost of qualified tuition and course material paid during the tax year.

Payments and refunds: In this section, you'll report any tax payments you've made throughout the year, including estimated tax payments and withholding from your paycheck. If you've overpaid your taxes, you'll receive a refund. [19]

See also

Related Research Articles

<span class="mw-page-title-main">Form 1040</span> IRS tax record

Form 1040, officially, the U.S. Individual Income Tax Return, is an IRS tax form used for personal federal income tax returns filed by United States residents. The form calculates the total taxable income of the taxpayer and determines how much is to be paid to or refunded by the government.

<span class="mw-page-title-main">Taxation in the United States</span> United States tax codes

The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2020, taxes collected by federal, state, and local governments amounted to 25.5% of GDP, below the OECD average of 33.5% of GDP.

A tax deduction is an amount deducted from taxable income, usually based on expenses such as those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. The difference between deductions, exemptions, and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

Under United States tax law, itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and are claimable in place of a standard deduction, if available.

Under United States tax law, the standard deduction is a dollar amount that non-itemizers may subtract from their income before income tax is applied. Taxpayers may choose either itemized deductions or the standard deduction, but usually choose whichever results in the lesser amount of tax payable. The standard deduction is available to individuals who are US citizens or resident aliens. The standard deduction is based on filing status and typically increases each year, based on inflation measurements from the previous year. It is not available to nonresident aliens residing in the United States. Additional amounts are available for persons who are blind and/or are at least 65 years of age.

A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may include withholding the employee portion of insurance contributions or similar social benefit taxes. In most countries, they are determined by employers but subject to government review. PAYE is deducted from each paycheck by the employer and must be remitted promptly to the government. Most countries refer to income tax withholding by other terms, including pay-as-you-go tax.

Tax returns in the United States are reports filed with the Internal Revenue Service (IRS) or with the state or local tax collection agency containing information used to calculate income tax or other taxes. Tax returns are generally prepared using forms prescribed by the IRS or other applicable taxing authority.

A tax refund or tax rebate is a payment to the taxpayer due to the taxpayer having paid more tax than they owed.

A child tax credit (CTC) is a tax credit for parents with dependent children given by various countries. The credit is often linked to the number of dependent children a taxpayer has and sometimes the taxpayer's income level. For example, with the Child Tax Credit in the United States, only families making less than $400,000 per year may claim the full CTC. Similarly, in the United Kingdom, the tax credit is only available for families making less than £42,000 per year.

Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, tax withholding applies to employment income. Many jurisdictions also require withholding taxes on payments of interest or dividends. In most jurisdictions, there are additional tax withholding obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use tax withholding as a means to combat tax evasion, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

<span class="mw-page-title-main">Income tax in the United States</span> Form of taxation in the United States

The United States federal government and most state governments impose an income tax. They are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. Most business expenses are deductible. Individuals may deduct certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits, and an Alternative Minimum Tax (AMT) applies at the federal and some state levels.

Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending March 31, 2018, the federal government collected just over three times more revenue from personal income taxes than it did from corporate income taxes.

<span class="mw-page-title-main">Form W-4</span> US Employees Withholding Allowance Certificate IRS form

Form W-4 is an Internal Revenue Service (IRS) tax form completed by an employee in the United States to indicate his or her tax situation to the employer. The W-4 form tells the employer the correct amount of federal tax to withhold from an employee's paycheck.

<span class="mw-page-title-main">IRS penalties</span>

Taxpayers in the United States may face various penalties for failures related to Federal, state, and local tax matters. The Internal Revenue Service (IRS) is primarily responsible for charging these penalties at the Federal level. The IRS can assert only those penalties specified imposed under Federal tax law. State and local rules vary widely, are administered by state and local authorities, and are not discussed herein.

The United States Internal Revenue Service (IRS) uses forms for taxpayers and tax-exempt organizations to report financial information, such as to report income, calculate taxes to be paid to the federal government, and disclose other information as required by the Internal Revenue Code (IRC). There are over 800 various forms and schedules. Other tax forms in the United States are filed with state and local governments.

The Economic Stimulus Act of 2008 was an Act of Congress providing for several kinds of economic stimuli intended to boost the United States economy in 2008 and to avert a recession, or ameliorate economic conditions. The stimulus package was passed by the U.S. House of Representatives on January 29, 2008, and in a slightly different version by the U.S. Senate on February 7, 2008. The Senate version was then approved in the House the same day. It was signed into law on February 13, 2008, by President George W. Bush with the support of both Democratic and Republican lawmakers. The law provides for tax rebates to low- and middle-income U.S. taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by government-sponsored enterprises. The total cost of this bill was projected at $152 billion for 2008.

<span class="mw-page-title-main">Earned income tax credit</span> Refundable tax credit for low-to-middle class individuals in the U.S.

The United States federal earned income tax credit or earned income credit is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. The amount of EITC benefit depends on a recipient's income and number of children. Low-income adults with no children are eligible. For a person or couple to claim one or more persons as their qualifying child, requirements such as relationship, age, and shared residency must be met.

The United States taxes citizens and residents on their worldwide income. Citizens and residents living and working outside the U.S. may be entitled to a foreign earned income exclusion that reduces taxable income. For 2024, the maximum exclusion is $126,500 per taxpayer. Taxpayers filing a joint return are entitled to up to two exclusions if both have earned income. In addition, the taxpayer may exclude housing expenses in excess of 16% of this maximum but with limits.

The alternative minimum tax (AMT) is a tax imposed by the United States federal government in addition to the regular income tax for certain individuals, estates, and trusts. As of tax year 2018, the AMT raises about $5.2 billion, or 0.4% of all federal income tax revenue, affecting 0.1% of taxpayers, mostly in the upper income ranges.

In the United States, an income tax audit is the examination of a business or individual tax return by the Internal Revenue Service (IRS) or state tax authority. The IRS and various state revenue departments use the terms audit, examination, review, and notice to describe various aspects of enforcement and administration of the tax laws.

References

  1. ↑ "Tax Return". Investopedia. Retrieved 2021-12-08.
  2. ↑ "WHAT IS TAX REVENUE". Business Standard India. Retrieved 2021-04-18.
  3. ↑ "Tax - Tax revenue - OECD Data". theOECD. Retrieved 2021-04-18.
  4. ↑ Australian Government Australian Securities & Investments Commission (2018-06-21). "Your first tax return | ASIC's MoneySmart". www.moneysmart.gov.au. Retrieved 2018-08-22.
  5. ↑ "Which countries tax their citizens the most?". World Economic Forum. 11 November 2019. Retrieved 2021-03-27.
  6. ↑ "11 lowest income tax countries in the world right now". The CEO Magazine. Retrieved 2021-03-27.
  7. ↑ "What Is a Tax Schedule?". The Balance. Retrieved 2022-03-19.
  8. ↑ Office, Australian Taxation. "Income tax return". www.ato.gov.au. Retrieved 2018-08-22.
  9. ↑ "Does Everyone Need to File an Income Tax Return?". turbotax.intuit.com. Retrieved 2021-03-28.
  10. ↑ "What Is a Tax Refund and Why Do You Get One?". SmartAsset. 2021-01-22. Retrieved 2021-03-28.
  11. ↑ Huseman, Jessica (20 March 2017). "Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It". propublica.org. Retrieved 30 June 2022.
  12. ↑ "What other countries use return-free filing?". taxpolicycenter.org. Retrieved 30 June 2022.
  13. ↑ "Time to prepare and pay taxes (hours) | Data". data.worldbank.org. Retrieved 2021-03-27.
  14. ↑ "Policy Basics: Where Do Federal Tax Revenues Come From?". Center on Budget and Policy Priorities. 20 August 2012.
  15. ↑ Motiani, Preeti. "ITR filing: Computing your total taxable income | How to calculate income tax". The Economic Times. Retrieved 2022-03-19.
  16. ↑ Zaheer, Jaxon Rylah, Kinza (2023-06-16). "Understanding Tax Returns in Australia: In Depth Overview". Taxly.ai. Retrieved 2023-11-14.{{cite web}}: CS1 maint: multiple names: authors list (link)
  17. ↑ "Taxpayers should know the difference between standard and itemized deductions | Internal Revenue Service". www.irs.gov. Retrieved 2022-03-19.
  18. ↑ CNBC.com, Jennifer Woods, special to (11 April 2016). "The top 10 tax credits that should be on your radar". CNBC.{{cite web}}: CS1 maint: multiple names: authors list (link)
  19. ↑ "Mastering IRS Tax Form 1040: U.S. Individual Tax Return". 2023-09-11. Retrieved 2023-11-29.
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