When we talk about a tax year, we talk about the 12-month calendar year covered by a tax return. In the United States, the tax year begins on January 1 and ends on December 31 of each year, including taxes due on earnings.
Taxes withheld or due will be reported the following year, e.g., taxes generated for the 2022 tax year will have to be included in the tax return sent to the IRS in 2023.
The deadline for filing this tax is usually around April 15 of the following year, although sometimes a late payment is filed.
Understanding the tax year
When we talk about a tax year, we discuss an annual accounting period that allows you to pay or withhold taxes, keep records, and report income and expenses. In the case of salaried individuals, they pay taxes during the entire calendar tax year.
At the beginning of the following year, they report the wages they paid to the IRS and pay any shortfall in their taxes owed. You could request a refund if too much has been paid.
Self-employed individuals and small business owners usually file quarterly returns. These returns report income, and an estimated tax is paid for the quarter.
They must also file annual returns to balance the books to pay the difference or request a refund.
Calendar year or fiscal year?
Businesses can use either the calendar year or the fiscal year for their fiscal year’s start and end date for income reporting. The calendar year is the 12 consecutive months beginning on January 1 and ending on December 31.
On the other hand, the fiscal year is 12 consecutive months, which may end on any day of any month, except for the last day of December. If a company’s fiscal year is less than 12 months, it will be considered a short fiscal year.
Exceptions for businesses
Although the IRS allows most businesses may use either the calendar year or the fiscal year, there will be exceptions. Taxpayers who file on the calendar tax year and then start a business must continue to file using the calendar year.
However, if you want to change this, you must request approval from the IRS to change it. Otherwise, you will not be able to do so.
Types of tax years
In addition to tax and calendar years, you should be aware that there are other types of years to consider, such as:
State tax years.
Each of the states can handle taxes independently of the federal system. However, most impose income taxes and use April 15 as a required filing date. Virginia is the exception, however, because its deadline is May 1.
Several states do not have income taxes. New Hampshire, for example, has no income tax and no sales tax, which is offset by relatively high property taxes. New Hampshire’s property tax year runs from April 1 to May 31 for all property owners.
Short fiscal years
Short fiscal years are those lasting less than 12 months, and these years occur when a business starts or the accounting period of the business changes. These tax years occur only for businesses. Individual taxpayers will normally have to file a calendar year return without having the option to choose a tax year.
This short tax year also occurs if a business changes its tax year, which requires IRS approval on Form 1128. In these cases, the short tax period begins on the first day after the previous tax year and ends on the day before the first day of the new tax year.
To better understand a business that reports its income from June to June but decides that it will change its tax year to begin in October. As a result, that business will have to report a short fiscal year from June to October.
How did the fiscal year originate?
Individuals generally use a December 31 tax year, with a return due on April 15 of the following year. However, this was not always the case. When the 16th Amendment was passed in 1913, taxing authority was granted to the federal government, and the date of March 1 was adopted as tax filing day. Over time the government moves the date to April 15, which is today’s date.
In 1954, when the deadline changed, the IRS stated that it helped distribute the workload because many returns were coming in simultaneously. This is because the number of eligible taxpayers increased because initially, with the 16th Amendment, only the very wealthy were expected to pay federal taxes, but the number has increased considerably until today.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.