The working class in the DC area has a tough time with taxes if they are single and have no kids. There are a few things that can be done to reduce the tax bill.
Go back to school. It doesn’t have to be a degree program to qualify. As of 2010, there were three different tax credits and a tuition and fee deduction that could possibly impact individual tax situations.
Increase 401k contributions. This reduces tax dollars earned on a W2, thereby reducing the amount of taxable income on the tax return. Singles that made less than $27,750 in 2010 may qualify for an additional $1000 Savers’ credit for contributing to a retirement plan.
Start a traditional IRA. In 2011, if a single wage earners’ income is less than $66,000 they can make tax deductible contributions up to $5000 a year, and $6,000 if over 50 years of age. A taxpayer may not be able to take the full deduction if adjusted gross income is between $56,000 and $66,000 due to the deduction phase-out. Withdrawals before age 59 ½ will be subject to a 10% penalty unless an exception is made.
If income is less than $120,000 a Roth IRA may be a good long term strategy. This doesn’t directly impact your initial tax situation but it will allow money to be withdrawn for qualified first time homebuyer expenses without the 10% tax penalty.
Purchasing a home has the largest impact. The mortgage interest and property taxes are generally the largest deductions that allow itemizing. Itemizing allows state tax deductions, charitable contributions, and other miscellaneous deductions that generally don’t add up alone, but can add to a grand total and help exceed the standard deduction. For more information on itemizing, see my article on charitable contributions.
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