Can filing taxes with Form 1040EZ cost me money?

By Amy Fontinelle AAA
A:

The 1040EZ Form is a simplified version of the main annual income tax return form, IRS form 1040. You can use it if you meet a number of requirements, including using the single or married filing jointly status, having taxable income of less than $100,000 and not earning more than $1,500 in interest during the tax year.

While 1040EZ will save you time and hassle in preparing your tax return if you meet the filing requirements, it can cost you money if you qualify for deductions and credits that form 1040EZ doesn’t allow, such as claiming dependents and itemizing mortgage interest.

One popular deduction not allowed on the 1040EZ is the student loan interest deduction. Taxpayers can deduct up to $2,500 in student loan interest using the full-length tax return form 1040 or the shorter form 1040A (which is more complex than form 1040EZ, but simpler than form 1040, though also with limitations). If you’re in the 25% tax bracket and have $2,500 in student loan interest to deduct, using form 1040EZ will cost you $625. No matter how much longer it takes you to prepare your return using a longer tax form, it will almost certainly be worth it in the money you’ll save. And thanks to tax software, the additional time should be minimal.

Using form 1040EZ will also cost you if you have itemized deductions that are higher than the standard deduction. Suppose you are filing single; your standard deduction is $6,200 in 2014. If you paid $8,000 in mortgage interest and donated $500 to charity, you have $8,500 in deductions that you can itemize. That’s an additional $2,300 in deductions, or a savings of $575 if you’re in the 25% tax bracket. You shouldn’t use form 1040EZ in situations like this one, either.

These are two of the most common ways using form 1040EZ could cost you money, but there are many others. IRS publication 17 can help you decide which tax form – 1040EZ, 1040A or 1040 – makes the most sense for your situation. Most income tax software programs will also guide you to use the form that minimizes your tax liability. Additionally, a tax professional can advise you on the best way to legally minimize your tax bill, including which form to use.

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