Which tax form to use?
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Filling out a tax form is about as much fun as paying taxes to Uncle Sam. The complexity of the task intensifies as your tax life gets more complicated.
This is why you should use the simplest tax return form possible, especially if you always fill out your forms by hand.
But choose carefully. There are three personal income tax forms – 1040, 1040A, and 1040EZ – each designed to send the appropriate amount of your money to the IRS. However, the differences in the forms could cost you dearly if you are not careful.
The EZ is the shortest and simplest form, the 1040A form is a bit more complex, and the 1040 long form is the most detailed and potentially difficult. But even if your tax life is simple and straightforward, it may be worth studying the other two forms. Why? In general, the longer the form, the more possibilities there are for tax relief.
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Health Care and EZ Limits
If you’ve already filed Form 1040EZ, but purchased health insurance through a state or federal Affordable Care Act exchange, known as the Marketplace, you can no longer complete this simpler form.
When individuals buy a policy through an exchange, they have the option of receiving an early payment of the premium tax credit. This tax credit covers part of the insurance costs. However, the amount of the advance credit must be recognized when the beneficiary of the policy files their tax return.
If the amount of the anticipated premium was too low, the taxpayer will get the supplement. However, if too much early premium credit has been paid, the taxpayer must make up the difference, either by paying any tax due or by deducting the amount from an expected refund.
These calculations are done on Form 8962, which can only be filed with Form 1040A or 1040. If you received advance premium tax credit payments, you must file one of these longer forms. instead of the 1040EZ.
Even if you didn’t get the premium credit up front but got health care through an exchange and want to claim it when you report, you need to complete 1040A or 1040.
How much EZ could cost you
Even though you can drop 1040EZ, that might not be the best solution.
Take the case of 2016 tax filer Joe P. Taxpayer. Joe graduated from college last year and got his first full-time job earning $ 40,000. He is single, a tenant and has no investment income. A perfect 1040EZ filer, right? Of course if you are Uncle Sam because Joe will be paying too much tax using the short form.
Why? Form 1040EZ does not offer Joe any of the valuable tax breaks found on the other two returns.
Joe has a student loan. By completing Form 1040A, he can subtract from his income the $ 2,500 in interest he paid on this debt. He can’t do that in the shortest form. Joe also began planning for retirement by putting the maximum of $ 5,500 in a traditional individual retirement account. Since his new employer doesn’t offer a company pension plan, Joe’s deductible IRA contribution can further reduce his taxable income, but only if he files the longest form.
By choosing the 1040A over the 1040EZ, suddenly Joe owes taxes on just $ 32,000 instead of his full salary of $ 40,000. And he fell into a lower tax bracket – the 15 percent instead of the 25 percent level – even before further reducing his taxable income by taking the personal exemption every taxpayer is allowed and the amount of. its standard deduction.
Joe would also have the option of lowering his actual bill if he files the longer 1040A. If Joe took a course to improve his job skills and was not reimbursed by his employer for the cost, he could claim the lifelong learning tax credit; it’s also available on the long Form 1040. The best tax news for Joe is that a loan gives you a dollar-for-dollar reduction in what you owe the IRS. But the only tax credit displayed on the 1040EZ is the Working Income Tax Credit, available only to low-income taxpayers.
So choosing to file Form 1040A instead of 1040EZ saves Joe a bundle. And there are even more tax savings opportunities on the long Form 1040. They might not apply to Joe, but they could lower your tax bill – if you take the time to. examine each of the forms. Here are the basic guidelines for the three individual tax returns.
The simplest IRS form is Form 1040EZ. And since the IRS doubled the income limit for filers who use it, the EZ has become available to even more taxpayers.
You can file the 1040EZ return if:
- Your filing status is single or married filing joint.
- You are under 65 years old. Your spouse must also meet the age requirements if you are filing a joint return. If your or your spouse’s 65th birthday is January 1, then for filing purposes you are considered to have turned 65 last year and therefore cannot file this form.
- You (or your spouse if this is a joint return) were not legally blind in the last tax year.
- You have no dependents.
- Your interest income is less than $ 1,500.
- Your income, or the combined income of the joint filers, is less than $ 100,000.
The one-page 1040EZ’s ease is appealing, but it limits the number of ways you can save on your tax bill.
As already mentioned, this shortest personal statement limits tax filers to claiming only one credit: the Earned Income Tax Credit, or EITC, a tax break designed to help people who don’t earn much. silver.
You should also review these other two individual tax returns to take advantage of additional income adjustments and tax credits.
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Form 1040A is the next step in the tax forms ladder. Similar to Form 1040EZ, the income limit for filers wishing to use the 1040A has increased, so more taxpayers should be able to use it.
People who choose the 1040A can file using one of the five deposit status options available: single, married, joint or separated filing, eligible widower or widower, or head of household. People who file the 1040A can also claim, in addition to the EITC, several tax credits – child, extra child, education, dependents, elderly or disabled, and tax credits. retirement savings – which are not available with EZ.
You can also file Form 1040A if:
- Your taxable income, or combined income, is less than $ 100,000.
- You have capital gains distributions, but no other capital gains or losses.
- You don’t itemize the deductions.
Form 1040A also gives you the option of claiming multiple income adjustments. These items are sometimes referred to as above-line deductions because you claim them right before the last line of the form, the one where you enter your adjusted gross income. By reducing your total gross income, your taxable income will be lower and your tax bill should also be reduced.
Adjustments allowed on Form 1040A include educator expenses, certain IRA contributions, interest on student loans, and certain tuition and university fees.
Finally, choose Form 1040 if your income is larger, if you itemize deductions, or if you have more complex investments and other income to report. This usually means that additional tax documents must also be filed.
Additional paperwork is also associated with the many tax credits that only appear on the long Form 1040. The extra work, however, is offset by the additional savings that these credits have, such as that for taxes you paid. in a foreign country or one that helps cover some adoption costs, can produce for 1040 filers.
The longest tax return also offers over a dozen above-the-line deductions that you can claim directly on the form itself (versus the four adjustments found on the 1040A). These allow you to reduce your gross income, thereby reducing the amount of income that is ultimately taxed. Adjustments include, among other things, breaks for support payments you’ve made, self-employment taxes you’ve paid, or moving expenses you’ve incurred.
These income deductions can be found at the bottom of the 1040 homepage, which means you don’t have to worry about Schedule A and its retail limits. However, you will need to complete an additional form or schedule to claim some of these breaks.
You must complete Form 1040 if:
- Your income, or the combined income of the joint filers, is greater than $ 100,000.
- You detail the deductions.
- You have self-employment income.
- You received income from the sale of a property.
Keep in mind that just because you received a particular income tax form in the past, doesn’t mean you should use it. If your situation has changed – let’s say you now have enough deductions to make the breakdown worth it – then complete a different form.
It could be the tax money in your pocket.
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