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Taking the 1040EZ way out could
cost you at tax time
By Kay
Bell • Bankrate.com
When it comes to taxes, most of us look for
the quickest way to get through filing season. But if you opt for
the 1040EZ way out, you could pay the Internal Revenue Service more
than you should.
Don't automatically think that filing a longer
1040 isn't worth your while. If your tax life is not that complicated,
it might not take much more time at all. You don't have to fill
out every line, just the ones that apply to you. And it could give
you several shots at cutting your tax bill.
Let's look at Joe. He finished college last
year and got his first full-time job making $30,000. He's single,
renting and has no investment income. A perfect 1040EZ filer, right?
Sure, if you're Uncle Sam, since Joe will overpay his taxes by using
the short form.
Why? Joe has a student
loan. By filing the 1040A he can subtract from his income the
$2,500 interest he paid on that debt. He also started planning for
his retirement by putting $3,000 into a traditional IRA. Since his
new employer doesn't offer a company retirement plan, Joe's deductible
IRA contribution can reduce his taxable income further -- but
only if he files the longer form.
By choosing the 1040A over the 1040EZ, suddenly
Joe owes taxes on just $24,500 instead of his full $30,000 salary.
And he's dropped into a lower tax
bracket (the 15 percent range instead of the 25 percent rate)
even before he takes the standard
deduction every taxpayer is allowed.
If Joe files a 1040EZ, he cheats himself. That's
because this shortest form doesn't allow him to adjust income like
the 1040A does. The still-longer Form
1040, which Joe also could have used to claim his student loan interest
and IRA tax breaks, provides even more tax-cutting chances. A filer
using this tax return gets more than 10 ways to take income off
the top before he computes his tax bill. And the deductions are
all on the form -- no Schedule A and itemizing limits to worry about.
Plus, both the 1040A and 1040 offer tax credits
not found on the EZ. These breaks could reduce your eventual bill
even more.
So take a few extra minutes to look over all
three forms and determine which one best suits your tax situation.
It could help you pocket more tax cash. Remember that in tax season,
time often truly is money -- yours!
Freelance writer Kay Bell writes Bankrate's tax
stories from her home in Austin,
Texas, and blogs on tax topics at Don't
Mess with Taxes.
-- Updated: Feb. 21, 2006
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