TAX TIP No. 3
Which tax return form should you use?
The ease of the one-page 1040EZ is
appealing, but it limits the number of ways to save
on your tax bill.
This shortest personal return restricts filers to claiming
just one credit: the earned income tax credit, or EITC, a tax break
designed to help out individuals who don't make much
money. And even how you collect the EITC can
determine whether you can file the EZ. If you got advance payment of the earned income credit during the year
through your employer, then you can't use this easiest of returns; you'll have to file the long 1040 or 1040A.
You also need to look at those other two individual
tax returns to take advantage of additional income adjustments
and tax credits.
The 1040A form is the next step up the
tax-form ladder. As with the
EZ form, the earning limit
on filers wanting to use the
1040A has increased, so more
taxpayers should be able to
Individuals choosing the 1040A
can file using any of the five available filing
status options: single, married filing jointly or separately, qualifying widow or widower, or head of household. 1040A filers also can
claim, in addition to the EITC, several tax credits -- the child, additional child,
education, dependent care, elderly or disabled and retirement savings
credits -- that are not available with the EZ.
You also can file Form 1040A if:
- Your taxable income, or combined
incomes, is below $100,000.
- You have capital gain distributions, but
no other capital gains or losses.
- You do not itemize deductions.
- The only adjustments to your income are from
deductible IRA contributions, student loan interest payments, penalties on early withdrawal of savings or you handed over your jury duty pay to your employer.
Form 1040A also gives you the
chance to claim several adjustments to income.
These items are sometimes referred to as above-the-line
deductions, because you claim them just before
the bottom 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 be
Adjustments allowed on Form 1040A include educator expenses, certain IRA contributions, student loan interest and some college tuition and fees.
Finally, choose Form
1040 if your earnings are larger, you itemize deductions
or you have more complex investments and other income
to report. This usually means added tax paperwork needs
to be filed, too.
Additional paperwork also is
associated with the many tax
credits that show up only on the long
1040. The extra work, however, is offset by
the added savings these credits, such as the
one for taxes you paid to a foreign country
or the one that helps cover some adoption
costs, can produce for 1040 filers.
The longest return also offers more
than 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's ultimately taxed. The adjustments
include, among other things, breaks for alimony payments
you made, self-employment taxes you paid or moving expenses
These income deductions are found at the bottom of the 1040's front
page, meaning you don't have to hassle with Schedule
A and its itemizing limits. You will, however, have to fill out an
additional form or schedule to claim a couple of these breaks.
You should file Form 1040 if:
- Your income or combined incomes for joint
filers totals more than $100,000.
- You itemize deductions.
- You have self-employment income.
- You received income from the sale of property.
The "Which form should I use?"
section of IRS
Publication 17 has more details, examples
and special circumstances requiring additional forms.
And just because you got a particular
income tax form in the mail from the IRS doesn't
mean you have to use it. The agency sends
out forms based on your previous year's tax
filing. If your situation has changed -- say,
you now have enough deductions to make itemizing
worthwhile -- then file a different form.
It could be tax money in your pocket.