It is important to review the three types of individual tax forms. They are 1040, 1040A and 1040EZ. Each form has minor differences, which is why it is important to make sure it is the right option for your individual tax filing needs.
The quickest and easiest form is the 1040EZ, which is typically used by younger adults with no itemizations or dependents. The 1040A is a little more involved than the 1040EZ form and the 1040A is also known as the long form. You may need the assistance of a tax preparation specialist to prepare a 1040A properly.
Health Care and 1040EZ Form Limits
Once you purchase a health insurance plan from the Affordable Care Act’s federal marketplace, you cannot file a 1040EZ form. This is because options are given when purchasing a health insurance plan to receive an advance payment of a premium tax credit. The credit is designed to assist in affording some of the cost of the insurance plan. When you file your taxes, you have to claim the advance payment.
Now, if the advance was not enough, taxpayers could receive an extra amount. Taxpayers that were overpaid are held responsible for the overage. When taxpayers are left with a balance to pay, it can be deducted from the next advance payment. The taxpayer can also pay it.
To determine whether you were advanced funds appropriately or not, complete IRS Form 8962. This form must be filed with a 1040 or 1040A return.
How the 1040EZ Could Cost You
The 1040EZ form may not be the right option for you and can cost you money if you are not aware of some of the tax credits and deductions that could be available to you. Filing a 1040EZ form does not allow those with student loans to deduct student loan interest. If you have an individual retirement account (IRA), the EZ form does not have a place for you to reduce your taxable income by claiming the IRA.
By exploring the available deductions and tax credits on forms other than the 1040EZ, you can significantly reduce your overall taxable income. This can also put you into a lower tax bracket. For example, an $8,000 deduction on a $40,000 annual salary makes your taxable income $32,000. That would take you from the 25-percent tax bracket down to the 15-percent bracket. After standard deductions and personal exemptions, taxable income is reduced further.
Another advantage that is not allowed on 1040EZ filers is credits for education. The Lifetime Learning credit is available to those that were not reimbursed by employers to improve job skills. Since it is a credit, you deduct dollar-for-dollar of what you would owe the IRS.