Short Tax Year Required

• One of the situations that requires reporting income on a short tax year is reserved for business. It applies if your business intends to operate on a calendar year -- starting on January 1 and ending on December 31 -- but your business begins operating at some point after January 1. For that first year of operation, the business must file a tax return for the year from the time the business began operation to the end of the tax year it chooses. The second situation occurs if an individual or business decides to change its tax year. To do this, the taxpayer needs permission from the IRS. Permission is obtained by filing a completed Form 1128 along with a user fee of $1,500 to $3,000, depending on the taxpayer's circumstances. If the taxpayer obtains permission to change his tax year, he must file a short year return for the period beginning at the start of the former tax year and terminating at the end of his new tax year.
  
  

Calculating Annualized Tax for Individuals

• Filing a short year return is similar to filing a regular return, except some exceptions and deductions must be annualized. Begin by calculating your adjusted gross income (AGI), which is your taxable income before itemized deductions or the standard deduction is taken. When an individual files a short-tax year return, he must itemize his deductions. The itemized deductions need not be annualized and can be subtracted directly from AGI to determine income after deductions. Determine the dollar amount of the exemptions for which you qualify. Multiply that exemption amount by the number of months in your short tax year and divide the result by 12. This will give you the dollar amount of the exemptions you can claim. Next, subtract the annualized exemption from the income after deductions to determine your modified taxable income. Multiply the modified taxable income by 12 and divide the result by the number of months in the short tax year to determine your annualized income. Use the annualized income to determine your annualized tax amount based on the appropriate tax rate schedule. Multiply the annualized tax amount by the number of months in the tax year and divide that amount by 12. This will determine how much you owe in taxes.
  
  

Filing Personal Return

• When filing taxes for the short year, you still complete a Form 1040. However, it is important to specify the period covered at the top of the return. All 1040s use the calendar tax year as the standard setting, but there is a space to specify your short tax year.
  
  

Tax Tips and Disclaimer

• For complex returns, consult with a tax professional, such as a certified public accountant (CPA) or licensed attorney, as he can best address your individual needs. Keep your tax records for at least seven years in case you are audited. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice