What Is a Tax Return?
Let me explain what a tax return really is. It's a form you file with a tax authority, reporting your income, expenses, and other key financial details. This helps you figure out your tax liability, so you can either set up a payment or ask for a refund if you've overpaid. I recommend keeping your tax returns for at least three years, just to be safe.
Key Takeaways
Here's what you need to know at a glance. A tax return is the document you submit to report your income, expenses, and relevant finances. Through it, you calculate what you owe in taxes, arrange payments, or get back any overpayments as refunds. In most areas, you have to file these annually. The IRS suggests holding onto them for three years minimum, though some scenarios demand longer retention.
Understanding Tax Returns
In the U.S., you file tax returns with the IRS and possibly state or local agencies. For individuals, that's usually Form 1040 or 1040-SR for federal income taxes. Corporations use Form 1120, and partnerships go with Form 1065. Various 1099 forms cover income from sources outside regular employment. If you need more time to file, apply for an extension using Form 4868.
Before you toss out old tax returns, think about other uses. Your insurance provider or a lender might want to see them, so you could need to keep copies longer than the IRS requires.
The Sections of a Tax Return
Tax returns generally break down into three main sections where you report income and figure out deductions and credits you're eligible for.
Start with the income section. Here, you list all your income sources. The W-2 is the most common way to report wages, but you also include dividends, self-employment earnings, royalties, and capital gains.
Next come deductions, which lower your tax liability. These differ by location, but common ones include retirement contributions, alimony, and interest on certain loans. Businesses can deduct most operational expenses. You can itemize or take the standard deduction based on your filing status. After subtracting deductions, you get your adjusted gross income (AGI) and apply your tax rate.
Then there are tax credits, which directly reduce what you owe. These vary, but often cover things like dependent child care, being over 65, or having a permanent disability, though income limits might apply.
At the end, the return shows what you owe or how much overpayment to refund or carry over. You can pay in one go or set up periodic payments. If you're self-employed, estimate and pay quarterly taxes.
You have options for filing: do it yourself, use software, or hire a preparer. The IRS's Direct File is available in 25 states.
IRS and Record Retention
The IRS generally advises keeping tax returns for three years, but some cases require longer or even indefinite retention. Hold onto documents supporting your income, deductions, or credits until the limitation period expires—that's when you can amend or the IRS can assess more tax.
These periods start after filing, with early filings counted as on the due date. The IRS provides specific guidelines: keep for three years unless certain situations apply; for refund claims, three years from filing or two from payment, whichever is later; seven years for worthless securities or bad debt claims; six years if you underreport income by more than 25%; indefinitely if you don't file or file fraudulently; and four years for employment taxes after due or paid.
If there's an error on your return, file an amended one to fix it.
Other Tax Return Uses and Retention
Beyond audits, you might need old tax returns for various reasons, and retention periods can vary.
For loan applications, lenders often want recent returns to verify your finances—mortgage folks might ask for multiple years.
When applying to rent, keep several years' worth; landlords use them to check your stability, especially for income-based units.
For financial aid like FAFSA, retain at least two years since it requires detailed income info.
Government assistance programs might need three years to confirm eligibility and benefits.
Opening investment accounts could require older returns, depending on the account type and incentives.
Your financial planner might want as many as possible to review your earning history and plan ahead.
Frequently Asked Questions
What documents do you need to keep? Retain W-2s, 1099s, and receipts for deductions—they prove your income, expenses, and credit eligibility.
Are federal and state retention rules different? Yes, each has its own policies, so check before discarding anything.
Can you keep digital copies? Absolutely, as long as they're authentic, secure, unaltered, and accessible for audits.
The Bottom Line
A tax return lets you report your finances to authorities and calculate taxes. Keep them for three to seven years to handle audits, amendments, and other needs.
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