Welcome to this episode, I am going to be talking about tax returns, what they are, their differences, why do we pay taxes and how to pay taxes. Readers should see this as a crash course into the world of taxation. Many individuals don't pay tax because they either don't know how to file them or don't earn enough to pay them. Some individuals or entity don't pay taxes also because, the whole process seems ambiguous or they lack basic knowledge of doing taxes while some individuals willfully evade paying taxes.
Whatever stance they take, I will walk you through on the meaning of tax returns, why it is important to file for tax returns, how to file for tax returns, calculate tax returns, and show you where to register and file for tax returns.
At the end of this episode you will learn all there is to taxation and its importance, where we will also find that it is of great benefit to be a tax payer assuringly!
Tax Returns
Tax returns is basically like filling out paperwork to figure out how much money you made and how much of it you have to give back to the government in taxes. It's like keeping track of your earnings and what you owe in taxes.
This brings us to the concept of taxation and why we should pay taxes. Taxation is a key factor that is found in the blueprint of several nations. Almost every nation boosts its enconomy through taxation. In Nigeria, the Internal Revenue Service is responsible for the collection and remittance of taxes in accordiance with the tax law amid other constituted agencies both in federal and state levels respectively.
Taxation is one of the biggest sources of income for the government. There are basically two types of taxes;
- direct taxes and
- indirect taxes
and they both make up the tax renue.
Tax revenue is basically the cash the government gets from all those taxes they slap on things like your income, the stuff you buy, even property transfers. When we talk about total tax revenue as a percentage of GDP, it's like seeing how much of the country's money pie the government takes a slice of through taxes. And what do they do with all that money? They use it to fund things like schools, hospitals, roads, and even the military. It's like the cash flow that keeps the country running!
Components of a Tax Return
In most countries, the parts of a tax return are usually structured in the follow formats explained herein;
Income
Alright, so when we talk about income, we're basically diving into all the cash flow streams for a person. Think of it as money coming in from different places. In the U.S., the go-to form for this is the W-2 forms while in Nigeria is the H-1 forms, you know, the one you get from your job or employer. But it's not just your paycheck; it's also things like dividends and interest adding up to your cash pile. And for tax purposes, they split it into five categories:
- Salary,
- House Property,
- Business Profits,
- Capital Gains,
- and Other Sources
It's like breaking down your money game into different teams!
Taxable Income
Now, so you know when you get paid for your job or any other hustle? Well, taxable income is like the chunk of that money that the government takes a slice of. It's not just what you earn from your job, but also things like rental money, dividends from stocks, or even profits from your side hustle. But don't worry, they let you subtract some stuff before they start taking their share!.
However, it is beneficial for an employee/employer or even an entity to be prudent in tax returns because for instance, take into account during the COVID-19 pandemic several government across the world offered relief packages to every single citizens and business entities. Each relief package(cash compesation) was measured according to their tax returns.
Its a simple rule - you can't rub peter to pay paul. Those who cheated and was not honest while filing their w-2, h-1 or equiivalent tax forms according to type paid a price a great deal especially, when the government issued payments for tax refunds to both individuals and businesses during turbulent times like the pandemic.
In perilous times benefits or aids are evenly distributed to both individuals and business using tax return forms as yardstick.
Recommended read: Edo State has commenced the payment of N70,000 as minimum wage
Deductions
When you are calculating your taxes, there are these things called deductions. Basically, they're like discounts on your taxable income, which means you pay less tax.
For businesses, it's all about deducting expenses related to running the show. Think stuff like office supplies, rent, and all that jazz.
Now, for us regular folks, deductions can be things like the interest you pay on your mortgage, student loan interest, or money you put into retirement savings. You've got options here: you can either list out all these deductions one by one (that's itemizing), or you can just go with the standard deduction, which is like a set amount based on your situation.
Speaking of which, that standard deduction amount changes depending on things like how old you are and whether you're filing solo or with someone else. If you're a bit older, like 65-plus, you get a bit of a boost.
When you're ready to file your tax returns form, you can use Form 1040 or Form 1040-SR, whichever floats your boat. And if you're going the itemized route, make sure to hang onto those receipts and organize them neatly. Come tax time, you'll use Schedule A to list everything out, and make sure to keep those receipts handy in case the tax professionals comes knocking.
Tax Credits
Tax credits are like superpowers for your wallet. They're like discounts the government gives you for doing certain things, and they're way cooler than deductions because they actually slash the amount of money you owe. Picture this: if you have $500 in tax credits and your tax bill is also $500, boom, you pay nada. Tax credits come from all sorts of stuff. Like, if you're taking care of a kid under 13, you might snag a Child Tax Credit. And hey, in some places, your education expenses can earn you a tax credit.
Tax Refunds and Payments
This is where you spill the beans on any cash you've already given Uncle Sam during the year, whether it's from your paycheck or those pesky estimated payments. And here's the good news: if you've overpaid, guess what? You're getting a refund! Cha-ching!
Why Do I need to File a Tax Return
Depending on where you live, you might need to fill out a tax return. Basically, if you make under a certain amount of money, you're usually in the clear. But there are other factors, like what kind of cash you are bringing in, how old you are, and your filing status, that can shake things up.
Now, here is where it gets interesting: sometimes, even if you don't have to, you might still want to file a tax return. Why? because it could mean getting some sweet cash back from the government!
Oh, and let's clear up a common mix-up: a tax return is not the same as a tax refund. A refund happens when you have paid more taxes than you owe. But a tax return? That's like your annual report card to the tax agencies, where you spill the beans on all your income and expenses.
Filling out tax forms can be a drag, right? But hey, different countries have different ways to make it easier. Some have cool tax softwares where they keep track of all your tax history. Plus, in places like Denmark and Sweden, they even give you a head start by filling out most of the form for you!
And get this: on average, it takes around 232 hours worldwide to do your taxes. Crazy, huh?
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