What Is the Tax Year? Definition, When It Ends, and Types

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What Is the Tax Year? Definition, When It Ends, and Types

What Is a Tax Year?

A tax year is the 12-month calendar year that a tax return covers. Individual tax years in the United States span from January 1 to December 31 and include taxes owing on incomes earned during that time.

Taxes withheld or owing for earnings during the calendar year 2020, for example, would be included on the tax return that most taxpayers would file with the Internal Revenue Service (IRS) in 2021.

Individuals’ 2020 federal income tax filing date has been pushed up from April 15, 2021 to May 17, 2021. Payment might have been pushed back to the same day. Your state tax deadline may not have been pushed out.

If you were affected by the devastating February 2021 Texas snowfall, your deadline for paying your 2020 federal taxes has been pushed out to June 15, 2021. You may still be eligible if you do not reside in Texas but were impacted by the disaster.

Key Takeaways

  • A tax year is the 12-month period covered by a tax return.
  • Individuals have a calendar tax year that begins on January 1 and ends on December 31.
  • In the United States, tax returns for the calendar year are normally due on April 15 of the following year.
  • Business taxes may be submitted in either a calendar or fiscal year.

Understanding a Tax Year

A tax year is an annual accounting period in which taxes are paid or withheld, records are kept, and income and expenditures are reported.

People who make a living pay taxes throughout the fiscal year. They submit their salaries to the Internal Revenue Service (IRS) early the following year, generally on April 15, and either pay any deficiency in their taxes owed or seek a refund of taxes overpaid.

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Self-employed individuals and small company owners often file quarterly to record their earnings and pay an estimate of the taxes owed for that quarter. They also complete yearly paperwork to reconcile the accounts and either pay the difference or seek a refund.

For income reporting purposes, businesses may utilize either the calendar year or the fiscal year (FY).

A tax year that follows the calendar year is defined as the 12 months starting January 1 and concluding December 31. Except for the final day of December, a fiscal year is any period of 12 consecutive months that finishes on any day of any month. When a company’s tax year is less than 12 months, it is referred to as having a short tax year.

There are few exceptions to the IRS’s rule that most firms may utilize either a calendar year or the firm’s fiscal year. Taxpayers who file using the calendar tax year and subsequently become a sole proprietor, partner in a partnership, or shareholder in a S corporation must continue to file using the calendar year unless they seek IRS clearance to modify it.

Types of Tax Years

Aside from calendar and fiscal tax years, there are also state tax years and, as previously indicated, short tax years.

State tax years

Every state handles taxation independently of the federal system, although most levy income taxes and have an April 15 deadline for reporting. Virginia is an exception, with a May 1 filing date.

Several states have no income taxes. New Hampshire compensates for its lack of an income or sales tax with unusually high property taxes. For all property owners in New Hampshire, the tax year runs from April 1 to March 31.

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Short tax years

A fiscal or calendar tax year that is shorter than 12 months long is referred to as a short tax year. Short tax years arise when a company is established or when the accounting period of a firm changes. Only enterprises often have short tax years. Individual taxpayers must generally file on a calendar-year basis and do not have the option of selecting a fiscal year.

A short tax year may also arise when a company wishes to modify its taxable year, which needs IRS permission after the corporation submits Form 1128. In this situation, the short tax period starts on the first day after the previous tax year finishes and ends on the day before the new tax year begins.

Assume a company that declares earnings from June to June each year chooses to modify its fiscal year to begin in October. As a consequence, that company must record a fiscal year that runs from June to October.

History of the Tax Year

Individuals normally have a tax year ending on December 31, with an annual return due on April 15 of the following year, although this was not always the case. When Congress ratified the 16th Amendment in 1913, establishing the federal government taxing power, March 1 was designated as tax filing day. This date was gradually pushed back to where it is now, on April 15.

The IRS stated that changing the deadline in 1954 helped to spread out the burden since so many returns arrived at once. In any event, the shift to April has corresponded with an increase in the number of qualified taxpayers. When the 16th Amendment was ratified, a tiny number of very affluent people were required to pay federal taxes. Since then, the number of taxpayers has increased dramatically.

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