Saturday, February 14, 2009

Another Tip for Tax Season: EZ ≠ cool

For a few years at the beginning of tax season the IRS would mail me the federal 1040EZ form, and for lack of a known alternative I’d fill it out and send it back. And chances are if you’re relatively young and don’t make much money, then the IRS mails you a federal 1040EZ form to file your taxes as well.

The form’s titled EZ because using it to file is just that, easy--the 2008 form is barely half a page worth of accounting. Does the IRS think the cool abbreviation is right up young people’s alley? Who knows? But for young taxpayers--especially college students--who’d rather get tax season over with, with minimal thought, the quicker the better, the 1040EZ might be a little too easy.

Because if you’re using the EZ form by default, you might be overlooking some major tax adjustments, adjustments which could lower your gross income and possibly get you some decent cash.

Take for instance the Student Loan Interest Deduction. Every penny you paid in interest for a year on your student loans can be subtracted from your gross income. But you won’t find that tidbit on the 1040EZ form.

Take, for another example, the Tuition and Fees Adjustment. Every penny you spent on college tuition and college fees in one year can also be subtracted from your gross income, even if that tuition was covered by loans. Again, you’d be none the wiser if you were adhering to the 1040EZ form.1

Try instead form 1040 or the 1040A. The 1040 is for you if you plan to “itemize your deductions,” as the IRS calls it. Use the 1040 only if your qualified expenses add up to more than the IRS’s standard deduction.2 The 1040A, on the other hand, is for you if you don’t want to itemize deductions, i.e., if the IRS’s standard deduction is more money than all of your qualified expenses. And although the Student Loan Interest Deduction and the Tuition and Fees Adjustment I mentioned are certainly deductions from your income, the IRS lets you use them while still claiming the standard deduction, and you can do so with the 1040A. In other words, if you pay tuition or student loan fees, use the 1040A.

So if not paying more in taxes than you owe is worth it to you, and if the possibility of a refund is worth it to you, try researching the different tax forms that are out there. You aren’t required to use the form the IRS sends you, if the IRS sends you anything at all. Most forms can be found at the public library, and all can be found and downloaded online. Compare the 1040EZ to the 1040A and the 10403. You might be surprised at what you find.

[1] Also see “Hope and Lifetime Learning Credits” in our January 30, 2009 post “Tax Hacks, Part 1: Give yourself some credit,” for more information on tax breaks for educational expenses.

[2] See the 2008 rates of standard deductions.

[3] For an overview of and instructions for all 1040 forms, see the IRS’s “1040 Central.”

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