The Truth About Paying Fewer Taxes: Filling out the Right Form
This chapter is from the book
This chapter is from the book
This chapter is from the book
Form 1040 is the tax document, the one millions of us complete to report our income and figure any associated federal taxes or refunds due.
There are, however, three 1040 versions. Picking the appropriate one could save you money.
Form 1040EZ—Because tax filing is a dreaded task, the allure of an official form labeled EZ is understandable. And for many people, this simplest of the three 1040 versions is the perfect filing answer.
But there are some restrictions. The main one is income, both the amount and type. You must make less than $100,000 to file the EZ. Even if you meet the income limit, if your earnings include interest of $1,500 or more, you cannot use the form. Neither is it available if you’re living off of retirement account distributions.
Other 1040EZ prerequisites include the following:
- You be a single taxpayer or couple filing jointly.
- You have no dependents.
- You are younger than age 65. If you file a joint return, your spouse also must meet the age requirement. Be careful if you or your spouse were born on Jan. 1. In this case, for filing purposes the IRS considers you to have turned 65 the prior year, meaning you can’t file the EZ form.
One thing that catches the eyes of many taxpayers is the 1040EZ’s standard deduction amounts; they’re larger than the amounts shown on the other two 1040s. Don’t let that alone entice you to use the form; in reality, the standard deduction amounts are the same regardless of which 1040 version you use. The form simply combines the standard deduction and exemption amounts.
That’s a nifty shortcut, but this form offers only one additional tax break, the earned income tax credit (EITC) that is designed for lower-income workers.
Form 1040A—Form 1040A is twice as long as 1040EZ, but it offers many more opportunities to save on taxes. It also can be used by taxpayers who file using any of the five filing statuses (single, married filing jointly, married filing separately, head of household, or qualifying widow/widower).
- Form 1040A is twice as long as 1040EZ, but it offers many more opportunities to save on taxes.
It does, however, have a few limitations. Your income must be less than $100,000. But you are allowed to report more interest and dividend income. When it comes to capital gains, though, only capital gains distributions, not profits or losses from the sale of assets, are allowed on this form.
Older taxpayers will find the 1040A more amenable. Pension and other retirement income can be reported on this form. Even better, the 1040A allows age 65 or older and visually impaired filers to claim a larger standard deduction. Elderly and disabled individuals also can claim a special credit on 1040A.
In addition, 1040A offers four income adjustments, also commonly called above-the-line deductions because they are found on page 1 of the form, just above where you enter your adjusted gross income, or AGI.
The 1040A above-the-line deductions that help reduce your taxable income are educator expenses, traditional IRA contributions, student loan interest, and higher education tuition and fees.
More tax-cutting options are available through seven credits found on Form 1040A. In addition to the EITC found on the EZ and the previously mentioned elderly or disabled credit, Form 1040A allows you to claim the child, additional child, education, dependent care, excess Social Security withholdings, and retirement savings credits.
Form 1040—If you want the most tax-saving chances, use the long Form 1040, the granddaddy of tax forms. It first appeared in 1913 just after ratification of the 16th Amendment, which gave Congress the authority to enact an income tax. Today’s Form 1040 is packed with ways to report, and reduce, more types of income.
Form 1040 can be filed by a taxpayer using any filing status. It’s required if your earnings are larger, you itemize deductions, or you have a variety of investment and other income, such as self-employment earnings, to report.
Form 1040 also is closely associated with another well-known piece of filing paperwork, Schedule A. This is the document used to itemize tax-deductible expenses, such as medical costs; home-related expenses (mortgage interest and property taxes); other taxes (state income or sales taxes); and charitable donations.
Some of these deductions are limited to certain percentages of your adjusted gross income. Your overall itemized deductions also might be reduced if you earn over a certain amount. But if you have enough allowable expenses to exceed the standard deduction amount available for your filing status, you should itemize. And that requires you to file the long Form 1040.
This longest form also offers more than a dozen above-the-line deductions. As with the 1040A, these tax breaks, officially called “adjustments to income,” allow you to subtract certain amounts from your gross income. And although most people file Form 1040 because they itemize, you can claim above-the-line deductions regardless of whether you also file Schedule A.
In addition to the educator expenses, IRA contributions, student loan interest, and tuition and fees deductions found on the 1040A, the bottom of Form 1040’s first page offers deductions for alimony payments, moving expenses, a portion of self-employment taxes, and contributions to certain self-employment retirement and various health savings accounts. Several specialized deductions also are found only on Form 1040. Details on each of the above-the-line deductions are found in the form’s instruction book.
When you flip over the Form 1040, you’ll find the tax-saving opportunities afforded by various credits. In addition to those found on the other two returns, Form 1040 offers the foreign tax credit and half a dozen specialty credits, such as breaks for electric and other alternative-fuel vehicles, prior-year minimum tax paid, and several business credits.
Of course, the additional tax-saving possibilities of the longer Form 1040A and Form 1040 require more time and extra schedules. But that price usually is more than offset by a reduction in your tax bill.