Legal Definitions - tax return

A tax return is a mandatory financial document that individuals and organizations are legally required to submit annually to a government tax authority, such as the Internal Revenue Service (IRS) in the United States, or a relevant state or local tax department.

This document provides a comprehensive report of the filer's financial activities over the past year. It details all sources of income, any eligible deductions (expenses that reduce taxable income), and applicable tax credits (direct reductions in the tax owed). Based on these figures, the tax return calculates the amount of tax the filer owes to the government or, conversely, the refund they are due.

It's important to understand that a tax return represents the taxpayer's initial calculation of their tax liability. The government agency reviews this submission and may accept it as filed, or it may request additional information, make adjustments, or conduct an audit. Submitting a tax return accurately and on time is crucial to avoid penalties and interest charges.

• Example 1: A Salaried Employee with Investments

  Sarah works a full-time job and receives a W-2 form detailing her wages and taxes withheld. She also has a small investment portfolio that generated some capital gains during the year. To fulfill her tax obligations, Sarah files a federal tax return (such as IRS Form 1040) and potentially a state tax return. On these returns, she reports her salary, her investment income, and claims any eligible deductions, such as student loan interest. Her tax return consolidates all this information to calculate her total taxable income and determine her final tax liability or refund for the year.

• Example 2: A Small Business Owner

  Mark operates a freelance graphic design business as a sole proprietorship. Throughout the year, he earns income from various clients and incurs business expenses like software subscriptions, office supplies, and professional development courses. Mark uses his tax return (specifically, Schedule C, Profit or Loss from Business, which is part of his Form 1040) to report his gross business income, subtract all his legitimate business expenses, and arrive at his net taxable business income. This filing allows him to accurately calculate his self-employment taxes and income tax liability for his business activities.

• Example 3: A Retired Individual with Multiple Income Streams

  Eleanor is retired and receives income from several sources: a private pension, Social Security benefits, and distributions from her Individual Retirement Account (IRA). Each year, Eleanor files a tax return to report these different types of income. She might also itemize deductions for significant medical expenses or claim the standard deduction. Her tax return serves to aggregate all these financial details, calculate her total taxable income, and determine if she owes any additional tax or is entitled to a refund based on any taxes withheld from her pension or IRA distributions.