What is a Tax Year?
A tax year is the year for which a tax is calculated and paid.
How Does a Tax Year Work?
The United States has a January to December tax year for individual taxpayers. Let's say John files his tax return on April 15, 2012. This tax return is actually for the 2011 tax year, which runs from January 1, 2011, to December 31, 2011. According to the IRS, an individual taxpayer must adopt the calendar year as the tax year if he/she does not keep "books or records" or some other approved annual accounting period.
Companies don't have to adhere to a January to December tax year. Many use a different 12-month cycle. This is particularly useful if the company's fiscal year does not run from January to December.
Why Does a Tax Year Matter?
Knowing when a tax year begins and ends is crucial to effective tax planning. For example, individuals often try to make last-minute charitable donations, IRA contributions or stock sales in December in order to get as many tax deductions as possible before a tax year ends.
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