Last Updated on May 20, 2021 by MoneyVisual
Every financial year, individuals qualified to pay taxes (which is usually determined by age, civil status, and most of all, income) are highly encouraged to file an Income Tax Return or ITR. Some people think that filing for one is unnecessary, but not minding gives a lot more cons than the pros – if there are any at all.
This article includes the primary things you have to know about filing an income tax return.
Why is Filing for an ITR Important?
Understandably, filing for an ITR may not be one of the top things on your to-do list right now, especially that we are still on high alert because of the pandemic. However, putting it off much longer beyond the government’s extended deadline is also not advisable.
Filing an ITR is as important as paying your taxes. Listed below are some of the top reasons why:
1. Adjustments on Capital Losses and Gains.
Though having a capital loss on your investment isn’t a likable scenario, believe it or not, but you can use a capital loss ‘declaration’ on your tax return to attract profit opportunities. This is because you can adjust losses against future income, potentially reducing tax burdens of capital gains and recovering at least a part of your loss.
All these benefits on the condition that you must file returns regularly and within the set deadline. Failure to do so means that your losses will not be recorded on your tax return, and therefore, cannot be carried forward for the next consecutive years if ever you decide to claim for an adjustment.
2. Applying for Loans is Easier.
If you plan to apply for high-value loans such as home or automobile loans, a steady ITR filing record can be proven useful in this regard. Most of the loaning companies would likely require and insist that you submit proof of income over the past few years before they will decide to make a transaction with you.
Lenders consider your income tax return to be the most authentic document you can give that can serve as proof of your earnings. Even if you have a lower taxable income, filing for a return when applying for loans can also make your transaction smoother and easier.
3. Claim Tax Refunds with Ease.
Have you overpaid your taxes this time? Maybe, your tax payments have been deducted? Or the TDS deducted is higher than your total tax liability? These and a few other situations can make you qualified to claim your tax refund.
However, you cannot claim your refund if you haven’t filed your tax return for that fiscal year. To assess how much refund is due to you, you must first present or fill up an ITR form. The appropriate personnel will then process your return to determine the amount of refund.
Clearly, an ITR is a very important document you must secure if you plan to do major transactions like applying for loans, claiming your refunds, even processing your visa, and owning foreign assets. Most importantly, filing for one is an essential duty that every responsible citizen is encouraged to follow.
What Documents Should I Prepare?
Most taxpayers opt to hire professionals to do the job of completing and submitting their tax returns. If you plan on doing so, then, in this case, you have to prepare what you need for a tax return appointment. Being organized and systematic at times like this saves a great deal of your time and effort. Ensure that you have relevant documents such as:
Most Recent Income Tax Assessment
your tax return from last year is especially useful if you plan to hire a preparer or transfer to a new one. If you are working with the same preparer, though, you may not prepare this one.
Meanwhile, you may need to prepare bank details (bank name, account name, and number) and a medicare number if you have any medical expenses. Also, if you are married and have kids, you might want to prep their details, too.
you will also have to prepare the summaries of payment from where you have received a salary. Also included are any information on lump sum payments, income streams, foreign earnings, interest, dividends received, and any other means where you gained an income (e.g., from investments, allowances, or pensions).
Work-Related Expense Receipts
Including business traveling expenses, protective uniforms, clothing, other equipment purchases, receipts of any technology purchase related to your work such as a personal computer, telephone, and many others.
The requirements mentioned above are just some of the most common forms you will need to prepare in advance. Take note that each preparer may add a few more or differ in requirements. Generally, they would base their requirements on these three pieces of information: the basics, receipts of your earnings, as well as deductions.
What will Happen If I Don’t Apply for an ITR?
A thin line exists between ‘failing to pay’ and ‘failing to file.’ However, it can cost you a lot more if you fail to file for a tax return. There are corresponding penalties if you do not file your taxes, including a 5% to 25% fee of the total tax you owe each month.
In worst cases, these penalties could pile up, and you might not be able to afford them. If you continue to ignore your dues, the IRS can legally claim your property and assets and start talking about jail time.
Filing an ITR may seem voluntary, but it is also equally important to avoid expensive consequences and unnecessary inconveniences for your part. Likewise, preparing the required documents in advance when filing for a tax return will ultimately result in a seamless transaction.