As tax season concludes, it’s a good time to refresh your tax knowledge. In this week’s Money Wisdom Question Series, Ian Fergusson, RICP® discusses how filing your taxes works and why it’s essential to get your return right.

What is a Tax Return?

At its most basic, a tax return is a document filed with the federal and/or state government that reports an individual’s, family’s, or organization’s income over the course of a year. It also calculates any deductions or credits that may affect your overall tax liability. These details help determine whether you owe additional taxes or are eligible for a refund.

What’s Included in a Tax Return?

A tax return includes various components, including your income sources. This can include W-2 income, which is earned wages or salary, as well as 1099 income for freelancers, contractors, and other self-employed individuals. If you own a business, Schedule C income will be reported. Additionally, capital gains from the sale of assets such as investments or properties are also accounted for on the return as income.

A tax return will also include deductions which can reduce your taxable income and, in turn, your tax burden. Common deductions include contributions to qualified pre-tax retirement plans, such as 401(k)s or traditional IRAs. Tax credits are another way to minimize your tax obligation by directly reducing the amount of taxes you owe. You may be eligible for a child tax credit, for instance, if you had a child during the tax year.

How Tax Returns Impact Your Financial Life

The information on your tax return can impact many areas of your financial life. For instance, your tax return can affect your Medicare premiums and determine your eligibility for programs like Medicaid. It’s also a key factor for many government assistance programs when assessing eligibility for support. Beyond that, tax returns are often required when applying for mortgages, student loans, or even rental housing, as they provide a snapshot of your financial situation.

Why It’s Important to Get Your Tax Return Right

It’s crucial to ensure that all your income, deductions, and credits are accurately reported on your tax return. Inaccurate or incomplete information may lead to issues with the IRS, such as audits, penalties, or delayed refunds. Working with a qualified professional can help you avoid errors and get the most out of the opportunities available to you.