Income Tax Return: How It Works and How Long to Keep One
Taxes may be fact of life, but have you ever been up close and personal with a Form 1040? Here's a beginner's guide to understanding how federal income tax returns work.
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Unless you file by paper, you may not have a lot of face time with the various tax forms out there. But there’s value in understanding how a tax return works. Not only can it arm you with more confidence about filing — it can also help you better understand the role taxes play in your everyday life.
A tax return refers to the various forms a person or a business fills out to report their income and expenses to the IRS or another tax authority, such as a state department of revenue.
Tax returns ask for information about the types of income generated throughout the year and allow filers to claim tax breaks, such as credits and deductions. Most importantly, tax returns help individuals and businesses determine whether they’ve paid enough taxes throughout the year. If not, you may owe additional money to the IRS. If you've overpaid, the IRS will owe you a refund.
Disclosures: TurboTax Free Edition is for Simple Form 1040 returns only (no schedules except for Earned Income Tax Credit, Child Tax Credit and Student Loan Interest). Roughly 37% of taxpayers qualify.
How do federal tax returns work?
Broadly, when the term “tax return” is used, it is usually in reference to the main tax form needed to report income — Form 1040. This document asks filers to fill in their personal information, including age, filing status and number of dependents.
Depending on your income, how you want to take your deductions, or what kind of credits you plan to claim, you may need to fill out additional tax forms, sometimes known as schedules, and attach them to your 1040 when you file. For example, freelancers or small-business owners use a form called Schedule C to report the income they made or lost from a business.
Once all sections of the tax return and any supporting documents are complete, the final part of the 1040 will help determine whether you’re due a refund or owe a tax bill. Returns are then signed and sent to the appropriate governing tax body. For federal income taxes in the U.S., that authority is the IRS.
How to fill out an IRS tax return: Key sections
A Form 1040 consists of several sections that ask different questions to determine how much you may owe the government or how much you may get back. If you use tax software, a good program should run you through an interview-style questionnaire and populate the form(s) you’ll need to submit so you don’t have to deal with the paperwork.
Still, it can be helpful to understand what a standard tax return consists of. Generally, a 1040 form can broken down into these six parts:
1. Tax-filing status
The IRS will first ask you to select one of the five available tax filing statuses. Your status has an important trickle-down effect on much of your tax return. For example, it can affect which credits and deductions you’re eligible for, and how much of a standard deduction you can claim.
A tax return will also ask you to list any dependents you plan on claiming. This includes listing their names and Social Security numbers, as well as confirming their relationship to you.
The IRS’ definition of who qualifies as a dependent is broad but complicated. You’ll have to ensure that specific requirements — such as their age, where they live and what kind of financial support they receive from you — meet the agency’s approved guidelines.
Having dependents may make you eligible for certain tax benefits, such as the child tax credit or earned income tax credit, so finding out if you can claim them is worth the effort.
The most extensive section of a tax return is dedicated to collecting information about your various taxable income streams. The IRS asks about all types of income, including but not limited to:
To fill out this part of a return, you may need to refer to documents you received from work, financial institutions or other sources that paid you throughout the year. For example, people with IRA distributions will get a 1099-R statement from their plan provider outlining the total income they received from the distributions.
At the end of the income section, you can add adjustments that lower your taxable income. For example, if you paid student loan interest throughout the year, you might be able to deduct up to $2,000 of that interest.
This section also lets you choose between taking the standard deduction and itemizing.
The standard deduction is a predetermined amount you can take off your taxable income to lower how much of your earnings will get taxed. How much that amount is depends on your filing status and other factors, such as age or blindness. Most people take the standard deduction rather than itemize because it requires less work to claim, and ends up being a larger sum than they would get when itemizing.
People who itemize tend to do so because they have substantial deductible expenses, such as charitable donations or unreimbursed medical expenses. If that applies to you, it may require referencing other forms and paperwork to fill out Schedule A in addition to the 1040.
The next section of a tax return deals with claiming tax credits. These tax benefits can lower your tax bill more than tax deductions because they directly reduce your bill by the credit amount. Some tax credits are even refundable, meaning if the credit amount exceeds what you owe, you can get the overage back from the government as a refund.
Of course, before claiming a credit, you’ll need to ensure you qualify for it — each has specific rules and requirements. Common credits include the earned income tax credit, the child tax credit, the American opportunity credit and the lifetime learning credit.
The final section of a federal income tax return tallies up all the tax payments you made throughout the year (for example, through tax withholding on your paycheck) and any credits you’re claiming that will lower your liability. This helps determine whether you will get a refund, or if you’ll owe a tax bill.
Disclosures: TurboTax Free Edition is for Simple Form 1040 returns only (no schedules except for Earned Income Tax Credit, Child Tax Credit and Student Loan Interest). Roughly 37% of taxpayers qualify.
How long should you hold on to an income tax return?
Once you’ve filed, you might wonder how long you need to keep your paperwork or files. The IRS says typically three years. However, it’s worth keeping in mind that the agency can audit further back.
What is the difference between a tax return and a tax refund?
Although the two terms are connected, each one refers to a very different aspect of tax filing.
A tax return consists of the forms and paperwork tax filers use to report their taxable income and determine whether they owe taxes or are due money back. A tax refund occurs when you’ve overpaid your share of taxes throughout the year. The government then pays you back the overage.
Federal income tax returns are typically due mid-April. Those who need more time to get their paperwork together can apply for a tax extension, which gives them until mid-October to complete their tax return. Any taxes owed — or a good estimate — are still due by the regular filing deadline, regardless of an extension.
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