Young woman doing tax paperwork.

Tax Returns: What Are They And How Do They Work?

Andrew Dehan9-minute read
December 11, 2021

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If you make enough income each year, you'll have to file tax returns with the federal government and, depending on where you live, your state. The goal is to let the Internal Revenue Service (IRS) know how much money you made during the previous year.

Filling out tax returns will tell you whether you owe money to the government or if they owe you because you paid too much in taxes during the year.

The base level of income that requires you to file state or federal tax returns varies. Single people under 65 must file tax returns in 2022 if they made $12,550 or more during 2021, while those married and filing jointly must file taxes if they earned at least $25,100 during the year.

Filing your federal and state income tax returns really isn't that complicated if you understand how these returns work and what information the government wants. As you continue to earn income each year, filing your taxes will become little more than an annoying annual ritual.

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What Is A Tax Return?

The purpose of a tax return is simple: It's a series of forms that you fill out to show the government how much money you earned and how much you've already paid in taxes during the year.

Armed with this information, the IRS and your state government taxing bodies can determine if you've paid enough taxes throughout the year or if you owe the government more money. These bodies will also use your tax returns to determine if you’re owed a refund.

If you are an hourly or salaried employee, your employer withholds a percentage of your pay every pay period to cover the taxes you owe the government. Depending on how much your employer withholds, you might end up paying too much in taxes during the year.

If this happens, you are due a refund. You overpaid throughout the year, so the government will pay you back the amount you overpaid.

You'll have to file your state and federal tax returns once a year. Typically, you must mail your tax returns of the previous year by the end of day on April 15 of the current year. But if that day falls on a weekend or a federal holiday, Tax Day will be moved to the next business day.

How Do Tax Returns Work?

Whether you are a salaried or hourly employee, or you are a freelancer or independent contractor, you'll file your taxes by filling out IRS Form 1040.

You'll report your income and tax deductions on this form. Your income includes money you earn from wages, salary, tips, dividends, alimony, business income, capital gains, individual retirement account (IRA) distributions, Social Security benefits and other money sources.

You can also claim deductions that lower your yearly taxable income. Allowable deductions might include payments you've made throughout the year to an IRA, the money you've paid in interest on student loans and any contributions you've made to a health savings plan.

When you subtract your deductions from your yearly income, you arrive at your adjusted gross income. This is your taxable income, the income on which you must pay taxes.

Many taxpayers will have to file tax returns with both the federal government and their state government. That's because most states require their residents to pay income taxes.

As of 2021, just nine states didn't charge income taxes. Seven of these states – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming – charge no income taxes at all. New Hampshire and Tennessee don't levy income taxes on the wages of its residents, but they do tax investment income and interest.

Some larger cities also charge taxes for working and/or residing in them. Check your city’s guidelines to see if this applies before filing.

Federal Taxes

Federal taxes are the money you owe the federal government each year. The most common of these are income taxes. The government collects money through the year by withdrawing it from your paycheck. These taxes are used to help the government fund everything from the U.S. Military to Social Security, Medicare and Medicaid.

If you are a self-employed worker, independent contractor or freelancer, the government won't take money out of your paychecks throughout the year. You're responsible instead for making quarterly tax payments to the federal government in the form of estimated tax payments.

You estimate how much you think you'll owe the government in taxes for the year, and then make four payments throughout the year to equal this amount. Quarterly tax payments are usually due on April 15, June 15, September 15 and January 15 of the following year.

Paying taxes as a self-employed worker can be tricky. You’ll have to estimate how much you owe. If you pay too much, you might qualify for a refund. If you pay too little, you'll owe the federal government money on Tax Day.

It's important, too, to understand your tax bracket. Depending on your income and filing status, your money will be taxed at a different rate. Currently, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

If you fall into the 35% bracket, your income will be taxed at 35%. If you fall into the 12% bracket, your income will be taxed at 12%.

The chart below does a good job explaining what your 2021 income tax bracket will be depending on your income.

2021 Income Tax Bracket

Tax Rate

Single

Married Filing Joint

Head of Household

10%

$0 – $9,950

$0 – $19,900

$0 – $14,200

12%

$9,951 – $40,525

$19,901 – $81,050

$14,201 – $54,200

22%

$40,526 – $86,375

$81,051 – $172,750

$54,201 – $86,350

24%

$86,376 – $164,925

$172,751 to– $329,850

$86,351 – $164,900

32%

$164,926 – $209,425

$329,851 – $418,850

$164,901 – $209,400

35%

$209,426 – $523,600

$418,851 – $628,300

$209,401 – $523,600

37%

$523,601 and higher

$628,301 and higher

$523,601 and higher

State Taxes

Depending on where you live, you'll also have to file state tax returns. How much you'll pay depends on the approach taken by your state.

Some states impose a flat tax. These states tax all income at the same rate, no matter how much people earn throughout the year. Other states rely on a progressive tax. They, like the federal government, charge higher tax rates for those earning higher incomes.

For example, Illinois charges a flat tax rate of 4.95%, meaning you'll pay that percentage of your adjusted gross income in taxes. Indiana also charges a flat rate, but its rate is just 3.23%.

Alabama, on the other hand, charges a progressive income tax rate that ranges from 2 – 5%, depending on your income. Connecticut charges a tax rate of 3 – 6.99%, depending on which of seven tax brackets you fall into.

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How To File Tax Returns

Sitting down to manually file or e-file your taxes might seem intimidating, but you can make the process easier if you collect your important financial and personal information before you start your 1040 form.

Documents Required To File Your Tax Return

To start, you’ll need to provide basic personal information such as the Social Security number or tax ID number and the date of birth for everyone on your return. This will typically include your numbers and birthdate, of course, but also those of your spouse and dependents.

You'll also need your income and investment information. You'll get this information from various forms that should be sent to you before you file your taxes. Your W-2 form shows how much you earned during the previous year and how much of your earnings were withheld for taxes. Your employer must send you this form by February each year.

You'll also need your bank account information showing how much interest you earned on your savings accounts. If you made contributions to an IRA, you'll need Form 5498, provided by the financial institution offering your IRA and one that shows how much you contributed during the previous year.

Form 1098-E is also important. It lists how much interest you paid on student loans. If you have a mortgage, Form 1098 shows how much you paid in interest on that loan. Both forms matter because you might be able to deduct this interest on your taxes.

If you’re self-employed, you'll need your 1099 forms. These forms are sent to you by any client who paid you $600 or more during the previous year. You'll need to report these figures on your tax returns as income. If you received dividend income, you'll need to enter the numbers listed on Form 1099-DIV. And if you received any money or benefits from the government, this income will be listed on Form 1099-G.

Tax Return Filing Status

You’ll also have to determine your filing status. This is important because it helps determine how much in income tax you'll pay. You can file as:

  • Single: You'll file as a single taxpayer if you are not married and aren't being claimed as a dependent on someone else's tax returns. Single taxpayers are eligible for a standard deduction of $12,550 for the 2021 tax year.
  • Married filing jointly: Most people who are married file in this category. This allows them to file one joint tax return. If you file under this category, your standard deduction for the 2021 tax year is $25,100.
  • Married filing separately: Married couples can also each file their own tax returns, reporting only their personal income, deductions and credits. The standard deduction for taxpayers who file this way is $12,550 for the 2021 tax year.

Tax Deductions

Tax deductions are valuable. You deduct these from your adjustable gross income for the year, meaning they help you lower your taxable income. The more deductions you claim on your tax return, the lower your taxable income and the taxes you'll pay. Just make sure you only claim deductions that you are legally entitled to.

The most common deduction is the standard deduction. This is the amount of money that you can deduct from your taxes if you don't itemize other deductions. If you file as a single taxpayer, the standard deduction is $12,550 for the 2021 tax year. If you’re married and filing jointly, your standard deduction for the 2021 tax year is $25,100. This means you can deduct that much money from the taxes you owe.

It makes sense to claim the standard deduction if this amount is greater than the total amount of other deductions you'd be able to claim. For example, some deductions you can claim are:

  • Interest paid on your mortgage
  • Interest paid on student loans
  • Charitable donations you made
  • Contributions to IRAs and health savings accounts
  • Self-employment expenses

If your filing status is single and these other deductions total more than $12,550, it makes sense to forgo the standard deduction and itemize your deductions on your tax returns. If these deductions equal less than $12,550, it makes more sense to go with the standard deduction.

Tax Credits

The third section of your tax return focuses on tax credits. These differ from deductions in an important way: While deductions reduce your taxable income, credits are subtracted directly from your total tax bill.

If you owed $12,000 in taxes and qualified for a $5,000 tax credit, your tax bill would fall to $7,000.

There are several different tax credits. For instance, if you adopted a child, you might qualify for the adoption tax credit. This credit can run up to $14,400 for every child adopted during 2021.

If you have a dependent child, you might qualify for the child tax credit. According to the American Rescue Plan, all working families who make up to $150,000 as a couple or $112,500 as a single parent can receive $3,000 per child 6 – 17 years old, and $3,600 per child under 6 years old. Visit the White House website to learn more about the updated child tax credit and how to qualify.

Finally, it’s time to submit your return. You can file your tax return in many ways. You could, of course, choose to mail them to the IRS and your state government.

You can also file your tax forms online.

What Is A Tax Return Transcript?

What if you need to see your past tax information? You can do this by requesting a tax return transcript from the IRS.

A tax return transcript is a summary of your past tax return information, including your adjusted gross income, filing status and tax payments you've made.

You can request a tax transcript from the IRS whenever you'd like, and the agency won't charge you for them. You can request your tax return transcript for the current tax year and the prior 3 years. These transcripts can be used to help prove your income when you are applying for a mortgage, student loan or other type of loan.

There are several other types of tax transcripts provided by the IRS. In addition to the tax return transcript, the following are examples of other tax transcripts:

  • Tax account transcript: Similar to the tax return transcript, this type of transcript shows changes you made after you filed your original tax return. The tax account transcript is available for the current tax year and the prior 10 years.
  • Record of account transcript: This transcript type combines both the tax return and tax account transcripts into one comprehensive transcript. The record of account transcript is available for the current tax year as well as the prior 3 years.
  • Wage and income transcript: This transcript shows information from specific tax documents, including your W-2, 1099, 1098 or Form 5498. The wage and income transcript is also available for the current tax year and up to 10 years prior.
  • Verification of nonfiling letter: This document is requested if you didn’t file a tax return in the previous year. The verification of nonfiling letter is proof that the IRS has no record of your previous tax return. The letter is available for the current tax year and up to 3 years prior.

Why You May Owe Taxes

When you owe taxes, it’s because not enough taxes were paid throughout the year on income. This income comes in the form of investment returns, paychecks, pensions and even stimulus checks.

The Tax Cuts and Jobs Act passed in 2017 required people to update their W-4 form. If you did not update your W-4, it may be that less tax was withheld throughout the year.

Also, if you lost work due to the COVID-19 pandemic and/or went on unemployment, you may owe tax on your unemployment benefits.

When Will I Get My Tax Refund?

Are you owed a refund from the IRS? It’s understandable that you’d want to receive this money as quickly as possible. The IRS says that it generally takes about 3 weeks after it receives your tax return for the agency to mail your refund.

If you want your refund to arrive in fewer days, sign up for direct deposit with the IRS. The agency says that this will result in faster delivery of your tax refund.

The Bottom Line

There’s a reason people generally dread Tax Day: Filling out your tax returns isn’t fun. However, the process isn’t as grueling as you might think. If you gather your personal and financial information before you start filling out these forms – and depending on how complicated your finances are – you’ll find that the process doesn’t have to take more than an hour or two.

If you want more information about income taxes, tax deductions and the pros and cons of different filing statuses, check out the library of personal finance stories at Rocket HQ℠. There’s plenty of information to help you tackle any of these challenges.

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Getting your max refund has never been easier with TurboTax®.

Visit http://turbotax.intuit.com/lp/yoy/guarantees.jsp for TurboTax product guarantees and other important information. $0 Federal + $0 State + $0 To File offer is available for simple tax returns only with TurboTax Free Edition. A simple tax return is Form 1040 only (without any additional schedules) OR Form 1040 + Unemployment Income. Situations covered include: W-2 income; Limited interest and dividend income reported on a 1099-INT or 1099-DIV; Claiming the standard deduction; Earned Income Tax Credit (EIC); Child tax credits; Unemployment Income reported on a 1099-G. Actual prices are determined at the time of print or e-file and are subject to change without notice. Terms, conditions, features, availability, pricing, fees, service and support options subject to change without notice. Intuit, TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries.

Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.