To understand how a tax review works, we need to first recognize what it means to file your taxes in general. Every year millions of taxpayers sit down between the months of January and April to prepare their taxes based on the prior year.
Understanding Your Taxes
Simply put, a tax return is a summary of the income earned throughout the year, less any deductions or credits eligible for the specific tax payer. Once the taxable portion of income is calculated, it is then compared to the tax brackets for the year to determine how much tax should have been paid on the taxable income. This total calculated tax amount is then compared to the amount of tax payments made throughout the year (i.e., your withholdings from your paycheck) to determine if you should receive a refund or have a balance due.
If your income, deductions and credits are approximately similar year after year, your refund or balance due will be approximately the same, however if something changes, so will the end result of your taxes.
Understanding aTax Review
A tax review looks at a taxpayer’s income, deductions and credits, during the year under review, instead of in the following year. As an example, instead of calculating 2020’s tax refund / balance due in the year 2021 when there is no longer any way to make changes, a tax review calculates 2020’s potential for a refund / balance due during the 2020 year. In doing so, if a taxpayer is unhappy with the potential result for the year, then adjustments can be made.
Tax reviews use the knowledge of how your year looks so far and provide insight into what your year could look like if you continue down the same path.
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