Tax Year Explained and Tax Software That Can Help

what is a tax year? a tax year is the calendar year in which income taxes were withheld or the year for which an income tax return is being filed. begins january 1 and goes through december 31. the government will need to know what you earned for the above dates

The Balance / Ellen Lindner

The term "tax year" refers to the calendar year for most individual taxpayers—the 12 months from Jan. 1 through Dec. 31 when you earned income, had taxes withheld from your pay as an employee, paid in quarterly estimated taxes if you're self-employed, or made tax-deductible expenditures. It's the year preceding the typical April 15th deadline for filing your tax return.

Sort your important documents by tax year as you gather the receipts, income statements, and other documents you need to prepare your income tax return. In the end, it will make filing easier. Using the right software can simplify the process, and there are plenty of free and paid-for options to choose from.

Calendar Year vs. Fiscal Year

The IRS actually gives you two choices when it comes to your tax year—you're not necessarily stuck with using the calendar year. You can elect to use the fiscal year instead, but there are some important differences:

  • Most individual taxpayers elect the calendar year option, and they must do so if they don't keep adequate books and records to support using a fiscal year.
  • A fiscal year can end on the last day of any month other than December—otherwise, it would be a calendar year. It can vary from 52 to 53 weeks, and it's typically used by businesses.

Sole proprietors, shareholders in S corporations, and partners in partnerships can't simply begin using a fiscal year if they've already filed at least one tax return in previous years that was based on a calendar year. They must get special permission from the IRS to make the change.

How Tax Software Can Help

Ever-evolving tax legislation can make changes to exemptions and deductions from year to year, sometimes significant ones. It can be hard for the average taxpayer to keep up. Tax software is invariably updated to accommodate specific IRS rules according to the year you're filing.

Pay close attention to the complete title and description when you buy software to be sure it's for the right tax year.

Choosing the Best Tax Software

You can buy tax software that you install on your computer or online programs that you can access through an internet browser. In either case, different providers offer several versions to fit a wide range of individual tax needs, and both online and desktop tax software come with some advantages and disadvantages.

One company's "basic" version doesn't necessarily offer the same features as another company's "basic" product. "Premium" versions might share the same base features, but some have additional perks that you won't find in another software package.

Although it's rare, some software comes in a single version with all the features needed for just about any tax situation. But most are available in more than one version.

Tax software is typically only offered for free to new customers or those with very basic tax returns. You might have to pay for the product this year if you used a free version last year or choose another free tax software to use this year to avoid charges. You'll probably also have to pay if your tax situation has gotten more complicated.

Final Tips

There's likely a free tax software option to help you prepare your return in any tax year. All software comes with accuracy guarantees, and that can be a good deal with tax law changes. Most feature a tax refund guarantee to ensure that you get the biggest refund possible.

Most will also file a state tax return for you, but this can come at an additional cost.

Look for free tax software that some companies provide for military members if you or someone in your family is a U.S. service member. And don't overlook the Free File Alliance, a partnership between the IRS and several software providers that provides free return preparation and filing for those with incomes of $72,000 or less as of the 2020 tax year.

Fiscal year taxpayers might do best to look into using the services of a tax professional. Not all software is set up to accommodate a fiscal year—especially the free or basic versions.

Frequently Asked Questions (FAQs)

What happens if you have no tax liability throughout the entire tax year?

You may not need to file taxes if you don't earn enough taxable income. You don't need to file taxes if you earn less than your standard deduction. In 2021, that's $12,550 for single filers and $25,100 for those filing jointly. Even if you don't need to file, it may be in your best interest to do so. Stimulus payments during the pandemic were based on tax returns, for example, and anyone who didn't file tax returns missed those stimulus payments.

How do I know if I'm filing taxes for the correct tax year?

You should see the year clearly noted whenever you're filing taxes. It's on each IRS form you'll file, and if you're using tax software, the tax software should remind you of the tax year throughout the process. No matter whether your tax year is the same as your calendar year, you will always file taxes for the prior year. Taxes for the 2021 tax year will be filed in the 2022 tax year, regardless of how you define your tax years.