The Internal Revenue Service created Form 1040EZ to simplify tax filing for people with uncomplicated finances. When you use the form, you're ineligible for most of the tax deductions and credits available to people who use the full 1040 form or the abbreviated 1040A. The 1040EZ allows for only one tax credit -- the Earned Income Credit.
Form 1040EZ consists of just 12 lines, compared with 77 for the standard 1040 form. You pay a price for that simplicity, though, since most tax breaks are unavailable. Further, only people who meet specific criteria can use the form. You have to be under age 65 and single or married filing jointly. You can't have any dependents. Your taxable income can't be over a certain amount -- $100,000 as of 2012. And you can have income from only certain sources, among them wages, salaries, tips, interest of no more than $1,500, and taxable scholarships and fellowships.
Earned Income Credit
The 1040EZ lets taxpayers take the Earned Income Credit, or EIC. Congress created the EIC in the 1970s to encourage lower-income people to work rather than rely on public assistance. As initially designed, the credit offset a portion of the Social Security taxes paid by lower-income workers with children, allowing them to keep more of the money they earned. Over the years, changes to the tax code have made the credit bigger and expanded it to more people, including those without children.
Claiming the Credit
The instructions for Form 1040EZ include a worksheet for determining whether you qualify for the Earned Income credit and, if you are, calculating it. People filing 1040EZ qualify for the credit if they have earned income below a certain amount; as of the 2011 tax year, that amount was $13,660 for single people and $18,740 for married couples. The size of the credit depends on the amount of earned income you have -- if you have no earned income, of course, you get no credit. As of 2011, the maximum credit was $464. Members of the military who earn nontaxable combat pay can choose to include that pay or exclude it in their EIC calculations, whichever gives them the biggest credit. Claim the credit on Line 8a of the 1040EZ.
The EIC is a fully refundable credit, meaning that if your credit exceeds the amount you owe in income taxes, the government pays you the difference. Say you owe $300 in taxes for a given year. If you have an Earned Income Credit of $250, your tax bill gets reduced to $50. If your EIC is $325, the IRS will send you a check for $25.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.