Why do tax returns exist

In most countries, tax returns must be filed annually for an individual or business with reportable income, including wages, interest, dividends , capital gains , or other profits.

In the United States, tax returns are filed with the Internal Revenue Service IRS or with the state or local tax collection agency Massachusetts Department of Revenue, for example containing information used to calculate taxes.

Tax returns are generally prepared using forms prescribed by the IRS or other relevant authority. In the U. Corporations will use Form and partnerships will use Form to file their annual returns. A variety of forms are used to report income from non-employment-related sources. Application for automatic extension of time to file U. Typically, a tax return begins with the taxpayer providing personal information, which includes their filing status, and dependent information.

In general, tax returns have three major sections where you can report your income, and determine deductions and tax credits for which you are eligible:. The income section of a tax return lists all sources of income. The most common method of reporting is a W-2 form. Wages, dividends, self-employment income, royalties and, in many countries, capital gains must also be reported.

Deductions decrease tax liability. Tax deductions vary considerably among jurisdictions, but typical examples include contributions to retirement savings plans, alimony paid, and interest deductions on some loans. For businesses, most expenses directly related to business operations are deductible. Taxpayers may itemize deductions or use the standard deduction for their filing status. Once the subtraction of all deductions is complete, the taxpayer can determine their tax rate on their adjusted gross income AGI.

Tax credits are amounts that offset tax liabilities or the taxes owed. Like deductions, these vary widely among jurisdictions. However, there are often credits attributed to the care of dependent children and seniors, pensions, education, and many more.

After reporting income, deductions, and credits, the end of the return identifies the amount the taxpayer owes in taxes or the amount of tax overpayment. The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.

Skip To Main Content. Video: What Is a Tax Refund? All you need to know is yourself Just answer simple questions about your life, and TurboTax Free Edition will take care of the rest. Looking for more information? Get more with these free tax calculators and money-finding tools. Stimulus Check Calculator See if you qualify for a third stimulus check and how much you can expect Get started.

Tax Bracket Calculator Easily calculate your tax rate to make smart financial decisions Get started. Self-Employed Expense Estimator Estimate your self-employment tax and eliminate any surprises Get started. Documents Checklist Know what tax documents you'll need upfront Get started. Where taxes are high, businesses are more inclined to opt out of the formal sector. A study shows that higher tax rates are associated with fewer formal businesses and lower private investment.

A percentage point increase in the effective corporate income tax rate is associated with a reduction in the ratio of investment to GDP of up to 2 percentage points and a decrease in the business entry rate of about 1 percentage point.

Keeping tax rates at a reasonable level can encourage the development of the private sector and the formalization of businesses. Modest tax rates are particularly important to small and medium-sizeenterprises, which contribute to economic growth and employment but do not add significantly to tax revenue. In Brazil, the government created Simples Nacional , a tax regime designed to simplify the collection of taxes for micro and small enterprises. Revenue collections rose by 7. Simples Nacional was also credited with increasing the revenue, profit, paid employment and fixed capital of formal-sector firms.

Businesses care about what they get for their taxes. Quality infrastructure is critical for the sound functioning of an economy because it plays such a central role in determining the location of economic activity and the kinds of sectors that can develop. Basic education increases the efficiency of each worker, and good-quality higher education and training allow economies to move up the value chain beyond simple production processes and products.

The efficiency with which tax revenue is converted into public goods and services varies around the world. Recent data from the World Development Indicators and the Human Development Index show that economies such as Ireland and Malaysia — which all have relatively low total tax rates — generate tax revenues efficiently and convert the gains into high-quality public goods and services figure 2.

The data show the opposite for Angola and Afghanistan. Economic development often increases the need for new tax revenue to finance rising public expenditure. At the same, time it requires an economy to be able to meet those needs. More important than the level of taxation, however, is how revenue is used. In developing economies high tax rates and weak tax administration are not the only reasons for low rates of tax collection.

The size of the informal sector matters as well; the tax base is much narrower because most workers in the informal sector earn very low wages.

Efficient tax administration can help encourage businesses to become formally registered, thereby expanding the tax base and increasing tax revenues. In many transition economies in the s, the failure to improve tax administration when new tax systems were introduced resulted in the uneven imposition of taxes, widespread tax evasion and lower-than-expected tax revenue. Compliance with tax laws is important to keep the system working for all and supporting the programs and services that improve lives.

One way to encourage compliance is to keep the rules as clear and simple as possible. Overly complicated tax systems are associated with high tax evasion. High tax compliance costs are associated with larger informal sectors, more corruption and less investment.

Economies with simple, well-designed tax systems are able to boost businesses activity and, ultimately, investment and employment. Tax administration is changing as the ecosystem in which it operates becomes broader and deeper, mostly owing to the vast increase in digital information flows.

Tax administrations are responding to these challenges through the introduction of new technology and analytical tools. They must rethink how they operate, offering the prospect of lower costs, increased compliance and incentives for compliant taxpayers. In , Tajikistan launched the Tax Administration Reform Project and, as a result, the country built a more efficient, transparent and service-oriented tax system.

The modernization of IT infrastructure and the introduction of a unified tax management system increased efficiency and reduced physical interactions between tax officials and taxpayers. You can avoid overpaying by filling out employee tax forms correctly and estimating or updating deductions with greater accuracy. There are different reasons why taxpayers get refunds, and in other cases owe money to the government. If you work for an employer, you were required to fill out a W-4 form when you were hired.

On that form, you indicated the amount of taxes that needed to be withheld from each paycheck. Taxpayers receive a refund at the end of the year when they have too much money withheld.

Conversely, you will owe the government money if you underestimate the amount to taxes. While taxpayers usually forfeit their tax credits when they owe nothing, you may qualify for a tax refund through these exceptions:. You can request a tax refund from the government by filing an annual tax return. This document reports how much money you earned, expenses, and other important tax information.

And it will help you to calculate how many taxes you owe, schedule tax payments, and request a refund when you have overpaid. Once the government gets your tax return and processes your information, it officially approves you for a refund before sending off your money.