Tax Tips for Single People
If you’ve skimmed through my other blog posts, you might notice that I have lots of tips for people with children, people who are old, or people with various family situations. What you don’t see is much about people who are single and working. This post is for you.
If you’re a young adult out on your own, earning wages, and living in an apartment, you’ve probably noticed that you don’t have many tax deductions to work with. The three most likely things you might qualify for are the student loan interest deduction, the IRA deduction, and the retirement savings contribution credit. Other than that, unless you’re ready to buy a home, you usually don’t have much to work with. But let’s take a look at these three items.
Student loan interest deduction: if you’ve finished college, or are at least temporarily out, you’re probably paying student loans. The most you can claim per year for this deduction is $2,500—now that’s for the interest you pay, not the principal. I often find people trying to claim everything they paid and that won’t fly. You can only use the amount on your form 1098E that you get in the mail.
Now if you’re single and you make less than $60,000 per year, then you can claim the full amount of your deduction. If you make over $75,000 you lose the deduction completely. For those of you inbetween, you’re in what’s called the phaseout range. It’s a funky equation, bottom line, the closer you are to $75,000, the less you’ll be able to claim.
IRA deduction: My Dad always used to lecture me about saving for retirement. Now that I’m older, I just recycle his lecture. (I’m sure he doesn’t mind.) If you don’t have a retirement plan at work, you can put up to $5,000 into a traditional IRA and that money will not be subject to income tax. Let’s say your income was $50,000 a year. With just your standard deductions, your total tax would be $6,350. (Now hopefully you’ve been withholding all year and you wouldn’t have to pay in that much, that would be your total tax liability.)
But if you put $5,000 into an IRA, then your tax liability would go down to $5,100. By saving money for your retirement, you’d also save $1,250 off of your tax bill. That’s a pretty good bang for your buck.
If you do have a retirement plan at work, you can just reduce your taxable income by putting money into your 401(k) plan there. It works a lot like the traditional IRA. One thing to remember, if you do have a retirement plan at work and you make over $66,000 then you won’t be able to claim a deduction for an IRA contribution. You can still claim a full deduction if you make less than $56,000, and anything in between puts you into that “phase out category”.
Retirement Savings Contribution Credit: Putting money away for retirement can be especially helpful taxwise if you qualify for the Retirement Savings Contribution Credit. You can only claim this credit if you income is $27,750 or less though and you cannot be a full time student. So, if you graduated in May and started working in June you wouldn’t be able to claim the Saver’s credit this year. (But then we’re looking at the Education credit so that’s usually a better deduction anyway.)
The credit is worth between 10% and 50% of your retirement savings contribution. The maximum contribution you can claim is $2,000—so even if you put $5,000 into your IRA, you could only claim $2,000 towards the credit. The percentages work like this; if you made less than $16,750 you can claim 50% of your contribution. Up to $18,000 you claim 20%, and over that you get a 10% tax credit.
So let’s say you made $25,000 and put $1,000 into an IRA. You’d qualify for a $100 tax credit (1,000 times 10% is $100.) Another cool thing about this credit is that you can mess around with it. Let’s say that you make $28,000—oops, you can’t get a Saver’s Credit. But wait, if you put $1,000 into an IRA now your income is only $27,000 and you do qualify.
You don’t get a lot of tax savings options when you’re working and single, but it’s important to know what is available to you and how to make to most out of what you’ve got.