I need help with taxes and investing...?

Question

My goal is to get into a lower tax-bracket through the use of tax-deferring tools. I make approximately $40,000 a year, of which about $7,000 is overtime. I am single and live with several roommates. I believe I fall into the $30,650-74,200 tax bracket (Schedule X-Single). What would I need to do to get into the Head of Household bracket? ($10,750-41,050, Z-HoH) Is that a marriage thing or would I be eligible if I lived on my own?

In August my 401K kicks in, and I'll be putting the full 6% in, about $2,400 a year deferred I believe. Some calculator I found on Quicken.com says at about my rates, "Investing in a 401(k), instead of receiving the money as taxable salary, cuts your annual income tax by $792.00."
What else can I do to get into a lower bracket? IRA? (which type) maybe talk to my employer about a HSA? Those are tax-deferred I believe. Any other tools I can use that would benefit me down the road? Other ideas? I'm grateful for all help, thanks.

Answer 1

OK, answers so far have explained why you can't be a head of HH.

If you are making $40k/year in 2007, subtracting a Std. Deduction of $5200 and a personal exemption of $3300 leaves you with taxable income of $31500. This means that only $350 of your income will be taxed at $25%. The rest will be taxed at 15%.

Now even the part year 401k deferral will get your income down so that none of it is taxed at a rate higher than 15%. That means that any additional deductions only reduce tax by 15% of every deductible dollar. You now get to do a gut check as to whether certain deductions make sense.

You can also reduce your tax by way of credits rather than deductions. Go to College is the most apparent one.

Answer 2

To get into a lower tax bracket, try the following options if your employer has them.

1. Max out your 401(k). Depending on your employer, you can either put away up to 15% or $15,500 a year. 6% is usually the minimum amount to put away to get the full matching from an employer.

2. Have your health insurance deduction taken out pre-tax. There are certain benefits that can be taken out pre-tax. It isn't going to save you much in taxes, but every little bit helps.

3. Use a flexible spending account. Estimate your out of pocket medical bills for the year and have that amount taken out of your check pre-tax.

4. Open a Traditional IRA. You have to do this on your own. But you may be able to have money deferred into an IRA directly from your employer if you have direct deposit available.

Like the others stated, you have to file your return as single, not head of household.

Answer 3

You can only file as head of household if you provide more than half of the cost of keeping up a home for a dependent who is a close relative - a parent or a child for example.

As to your bracket of 25%: even without the 401K, last year you would have only had $40,000 - $8400 or $31,600 of taxable income, so only $950 of it would have been taxed at the 25%. The way the brackets work, only the amount of income over that bracket limit gets taxed at the higher rate, not all of your income. So putting $2400 a year into a 401K will mean your bracket is 15%.

Answer 4

To qualify as "Head of Household" you must keep a home for a qualifying child or a qualifying relative among other criteria. It sounds as if you live with "friends". You must also supply the majority of thequalifying child's (or relative's) total living expenses.

Answer 5

You can do foster care -- get deductions for kids you take care of on a temp basis.