Which 1040 Do I Use

A great question this week comes from one of my readers.  Which Form 1040 am I supposed to use?  As a professional tax preparer, I always recommend you let a professional handle the complicated task of determining your tax liability.  However, there are people who choose to go it alone with Turbo Tax or another of the myriad of self-help tax prep solutions.  But which form do you need to file?  How do you know the software is picking the correct one?  It’s obvious when you look at the 1040, 1040EZ and 1040A that two of them are much simpler to complete.  The 1040 is very complex and is meant to be flexible enough to handle all personal tax situations.  From a recent IRS Tax Tip, here is the answer you are looking for.

Here are some general rules to consider when deciding which paper tax form to file.

Use the 1040EZ if:

* Your taxable income is below $100,000
* Your filing status is Single or Married Filing Jointly
* You and your spouse – if married — are under age 65 and not blind
* You are not claiming any dependents
* Your interest income is $1,500 or less

Use the 1040A if:

* Your taxable income is below $100,000
* You have capital gain distributions
* You claim certain tax credits
* You claim adjustments to income for IRA contributions and student loan interest

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. Among the reasons you must use the 1040 are:

* Your taxable income is $100,000 or more
* You claim itemized deductions
* You are reporting self-employment income
* You are reporting income from sale of property

This year, the IRS stopped mailing paper books to taxpayers in an effort to save some money.  It’s even more important that tax payers pay attention to which form meets their needs now that they have to make the choice themselves.

On a side note, make sure you adjust your W-4 if you are getting a large allowance. Paycheck City has a great tool for making changes to your w-4 here.  Next week, I’ll discuss the logic behind the Form W-4.  If you complete it correctly, your refund will shrink and give you access to your own money throughout the year.

Social Security Started Over

Q. I have a unique variation of your “Social Security Tax on Everything” post… My wife’s small company decided to change their paycheck provider in July. The provider “reset” all employees yearly total earnings to zero and are therefore collecting the Social security tax from scratch. The provider claims they have to do this by IRS law. My wife had already paid the maximum of $6621.60. Will we be able to get the overpayment for the rest of the year back on our taxes? The instructions for line 69 of 1040, and form 843, seem to indicate that if your employer overwitholds then you are ineligible for a refund. She has not changed employers, just paycheck providers.

A.  This is a very good question.  Unfortunately, there is not enough information to answer your question.  It sounds like this employer may have switched to a PEO also known as a Professional Employer Organization.  Sometimes these are referred to as Employee Leasing Companies.  When an employer joins a PEO, the employer of record changes from the employee perspective and all Social Security and unemployment taxes start over for each employee.  PEOs can be a big cost savings for an employer by allowing a bunch of smaller employers to pool together for health insurance purposes to become one big client.  In your case, it would restart SS withholding however because technically, there is a different employer.  If this is not the case, I have no idea why SS would have started over.  Simply switching payroll providers would not cause this problem because the employer would be the same.  The employer would also feed in all Year-To-Date information from the old payroll provider to keep this kind of problem from surfacing.

Your second comment however is incorrect.  You can still obtain a refund of excess Social Security withholding from a single employer.  However, you must first ask the employer to refund the tax.  This quote is taken directly from the instructions from IRS Form 843 which is needed to request this kind of repayment, “A refund of excess social security or railroad retirement (RRTA) tax withheld by any one employer, but only if the employer will not adjust the overcollection.”  Refunds are available if your employer simply will not work with you.

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Social Security Tax on Everything?

Q.  I have a full-time and a part-time job with different companies.  My employers are both taking out Social Security tax.  Is this correct?

A. Good Question! There are several common misconceptions about Social Security withholding from a paycheck. This is probably one of the biggest. The answer is….a resounding YES!!! Each employer of record is required to withholding 6.2% of your taxable wage for Social Security purposes up to the annual limit.  That is $106,800 for 2010. Even if you have 5 jobs at once, each employer is required to withhold this amount. Even if you are retired and collecting Social Security and have a job somewhere just for fun, the employer is still required to withhold Social Security tax.

You may ask, “What happens if the income from all my jobs add up to more than that limit?  Can I get all my employers to stop withholding Social Security?”  The answer is no.  You do have the ability to get a refund on your tax return if the total Social Security tax paid during the year was more than the maximum required.  That is $6621.60 for 2010.  You’ll see this on line 69 of the 1040 form.  The biggest drawback to this is that the multiple employers are not permitted to recover the overpaid Social Security.  They will match 6.2% up to the limit for everyone regardless whether that employee will be refunded overpaid tax later in the year.

Which 1040 Do I Use?

Q. How do I know which 1040 I’m allowed to use? Does it really make a difference?

A. Yes! Each form has specific requirements that a taxpayer must meet in order to use it. IRS Tax Tip 2010-05 contains instructions on which form you should select.  Your options are:

1040EZ Requirements
Your taxable income must be below $100,000 and your earned interest below $1,500. You can only use the Single or Married Filing Jointly filing status. You must be under age 65 and not claim any dependents. You will not be claiming any of the special additional deductions for real estate taxes, motor vehicle purchase or disaster losses.

1040A Requirements
Your taxable income still must be below $100,000 to use this form. You want to claim the credits disallowed on the EZ form. You have capital gain distributions. You contributed to and IRA, paid student loan interest or higher ed tuition.

1040
Anyone can file with this form. However, if you have a simple tax situation, why go through the trouble of the long 2-page form if you don’t have to?

If you are confused about which form to file, you may wish to use the services of a professional tax preparer or CPA. Professionals are trained to help you understand your tax situation and can often make recommendations to help you improve your take home pay or lessen your tax bill in the upcoming year. Make sure you interview your tax preparer carefully. Not all of them are as prepared for any situation as you hope they will be.

Lots of Taxes but not many Taxpayers

The IRS just released it’s taxpayer statistics for the 2006 tax year.  With all the press dedicated to analyzing the new administration’s tax proposals, I thought it would be good to look at just who is paying taxes these days.

First, the average tax rate paid on all returns was 13.8%, which is slightly higher than the year before.  There were 138.4 million tax returns filed that year of which 67% had some level of income tax reported.  This is line 61 of the 1040, line 28 from the 1040A and line 11 of the 1040EZ form.   I think if more people looked closely at how much tax is assessed for their situation, they would be stunned.

Back to the statistics, the top 1% of taxpayers paid 39.9% of the tax paid that year.  The top 5% of taxpayers paid 60.1% of the total tax.  The top 5% of taxpayers includes those with Adjusted Gross Income of at least $153,542.  That means 95% of the taxpayers only pay 40% of the taxes on returns.

What does this mean?  There is only so much money that can be squeezed from the population of taxpayers.  If one takes into consideration the total Federal, Social Security, Medicare, State, Local, sales and property tax that each person in this country pays, it is truly a staggering number that in some cases could exceed 50% of income.

As I have stated before on this blog, individual consumers must find a way to live within their means.  No person can continue to spend more than they take in.  Eventually, they must repay the debts.  Invariably, in the lives of ordinary taxpayers, we have unforeseen issues occur that require we maintain a “slush fund”.  If no financial cushion is available, the average person would be forced into bankruptcy.  Let’s hope our federal, state and local governments can learn this principle soon as well.