Why Do I Need Last Year’s Tax Return to File This Year?
Understand the importance of last year's tax return in ensuring accuracy and compliance for this year's filing process.
Filing taxes can feel overwhelming, especially when managing the numerous documents and details required. One key resource taxpayers should have is last year’s tax return. While it may not seem immediately necessary, this document is essential for ensuring accuracy and compliance with current tax obligations.
Accessing your prior tax return streamlines the filing process by providing critical data for this year’s forms. Understanding its importance helps avoid errors and ensures a smoother experience.
Confirming Prior Adjusted Gross Income
The Adjusted Gross Income (AGI) from the previous year is a key figure in tax filing, used for calculations and verifications. AGI, which is your total income minus specific deductions, determines eligibility for tax credits and deductions. For example, it affects phase-out limits for credits like the Child Tax Credit and Earned Income Tax Credit, which can significantly influence your tax liability.
The IRS also requires last year’s AGI to authenticate electronic returns. Without the correct AGI, e-filed returns may be rejected, causing delays. If you no longer have a copy of last year’s return, the IRS offers an online transcript service to retrieve this information.
Checking Rolled-Over Deductions and Credits
Some deductions and credits from the previous year can carry over to the current year, reducing taxable income or increasing refunds. For instance, capital losses exceeding the annual $3,000 limit can offset ordinary income, with the excess carried forward. This is particularly beneficial for taxpayers with investment portfolios.
Certain education credits, like the Lifetime Learning Credit, may also roll over if not fully utilized. Additionally, energy-efficient home improvement credits might apply depending on legislative changes. Taxpayers should consult IRS resources, such as Publication 970, to ensure they maximize these benefits.
Matching Withholding Information
Reviewing last year’s tax return can help assess whether your withholding was appropriate, excessive, or insufficient. Withholding refers to the portion of wages your employer sends to the government as a partial tax payment. Comparing last year’s withholding, as outlined in your W-2 forms, to your actual tax liability can reveal whether adjustments to your withholding allowances are necessary.
If you received a large refund or owed a significant amount, it may signal the need to recalibrate your W-4 form. The IRS offers a withholding calculator to help make these adjustments, reducing the risk of underpayment penalties, which can reach 3% of the unpaid tax amount.
Reconciling Estimated Tax Payments
For individuals and businesses without automatic tax withholding, estimated tax payments are crucial. They ensure taxes are paid on income earned outside traditional employment, such as self-employment income, dividends, or rental income. Reviewing last year’s tax return helps evaluate whether previous estimated payments matched your actual tax liability.
The IRS requires estimated payments if you expect to owe at least $1,000 in taxes after accounting for withholding and credits. These payments should cover at least 90% of the current year’s tax liability or 100% of the prior year’s liability, whichever is less. For high-income earners with an AGI over $150,000, the threshold increases to 110% of the previous year’s liability. These rules, detailed in IRC Section 6654, help taxpayers avoid penalties for underpayment.
Addressing Outstanding Tax Obligations
Filing taxes involves not only reporting income and claiming deductions but also resolving any unpaid taxes from prior years. Last year’s tax return provides a record of outstanding amounts, enabling taxpayers to address debts proactively and avoid accumulating interest or penalties.
The IRS offers options for resolving unpaid taxes, such as installment agreements and offers in compromise. Installment agreements allow taxpayers to pay off debt over time with monthly payments based on their financial situation. Offers in compromise enable taxpayers to settle for less than the full amount owed if they meet specific criteria. IRS Form 656 outlines the eligibility requirements for these options. Addressing unpaid taxes promptly can ease financial strain and restore compliance with tax regulations.