The year covered by a tax return.
How Taxable Period Works
The taxable period is also known as the tax year. The calendar of the tax year starts on January 1st and runs until December 31st. During this period, individuals are required by the Internal Revenue Service to pay taxes on reported earnings they make during the period. For instance, the earnings made by individuals in the year 2021 will be subject to taxation in the year 2021.
A taxable period involves keeping records, withholding or paying taxes, and reporting expenses and incomes. Typically during April, an individual will have to report their paid wages to the Internal Revenue Service for the previous taxable period. Also, during this time, an individual can receive a refund of overpaid taxes or pay for a shortfall in their due taxes.
On the other hand, there are small businesses and self-employed people who file their taxes quarterly. During every quarter of the year, they have to report their income and pay income taxes estimated for that quarter.
Example of a Taxable Period
Jane filled her tax return on March 13th, 2019. She filled her tax return for 2018 that started on January 1st, 2018, and ended on December 31st, 2018. Because Jane overpaid on her taxes each month from her paycheck, she gets a refund of $1,100 from her federal taxes. Jane does owe $345 to her home state of Arizona as part of her state income tax.
Taxable Period vs. Fiscal Year
When it comes to reporting income, businesses can either use the fiscal year or the calendar year for the end and the start of the taxable period. On a calendar, the taxable period is the twelve consecutive months from January 1st to December 31st.
On the other hand, the fiscal year is a calendar of any of the 12 months running consecutively that can end on any day of any month—for example, June 6th, 2021, to June 6th, 2022.
Types of Taxable Periods
There are different types of taxable periods. Regardless of the federal system, there is the state system that handles their taxes independently. Most states impose their taxes on earned income, and the date of filling is usually during April, along with the federal system's taxation schedule. Some states do not have an income tax; for example, New Hampshire does not have an income tax. However, states like New Hampshire usually compensate for no income taxes by having relatively high property taxes.
A short tax year is either a taxable period or a fiscal year of fewer than 12 months. It occurs during two circumstances. These circumstances include the initiation of a business or when there are changes in the accounting period. The short tax years usually occur with companies and not individuals.
There is no option of a shorter fiscal year when individuals are paying taxes. Another occurrence of the short tax year is when the taxable year of a business changes. Any change of a taxable period of a company needs the approval of the Internal Revenue Service.