Did You Know There are Choices in Which Tax Form to Use?
Doing your own taxes is, to most people, about as much fun as getting a cavity filled. It's time-consuming, kind of painful, and you may end up owing lots of money at the end. That's why it's important to make sure you use the shortest, easiest tax form you can. Yes, there are short and long versions of the basic IRS tax forms for individuals, and it's up to you to make the right choice.
How do you know which tax form to use?
The choices for individuals doing their federal tax return are, in order of simplicity:
- The 1040EZ
- The 1040A
- The 1040 (called the Long Form)
The 1040 EZ
This is the one we'd all like to be using. It's just one page, and asks for basically your name, address, and your salary (from your W2). Standard deductions are applied, subtracted from your Adjusted Gross Income, and the taxable amount is calculated using tax tables. Voila: done in 10 minutes. A nice one-page tax form, it's the simplest one out there. So why would anyone use the longer versions? Simple: there are lots of ways to reduce your taxable income, and all of them but one are not found on the 1040 EZ form. Let's see what the next step up in simplicity offers us:
The 1040 A
Now, someone who wants to deduct the interest paid on a student loan cannot use the 1040EZ. He or she has to step up a level to the 1040A. Deductions are great because they help to reduce the taxable income. If you rack up enough deductions you may even fall into a lower tax bracket. That means not only are you paying taxes on less income, you are also paying the taxes at a lower rate. With the 1040 A you can claim more tax credits than you can with the 1040EZ. For example, if you have children, you get tax credits just for having them. But if you use the 1040EZ there's no line for entering that credit so you won't get it. An aside: getting credits on your federal tax return is what you are aiming for...it means paying less taxes. You can also claim taxes if you took care of an elderly relative. Or if you put money into the right kind of retirement account. Or paid tuition. All of these credits will no be available to you if you use the 1040EZ. You must use the 1040.
What if the 1040A isn't even enough for all the credits, deductions, and adjustments you have? Well congratulations you'll be using the most complex tax form: the 1040. If you have complex investments or you want to itemize your deductions, you use the 1040. And, for every credit you are claiming, there will probably be another form to fill out. If you are self-employed, say goodbye to the easy tax forms forever. Say hello to the long form: 1040 and all the attachments, schedules, and extra forms you'll be filling out come tax time.