Can anyone offer advice on making taxes less painful when you don't own a home or have kids?

Question

I'm hoping that someone out there can give me some advise on how to relieve my tax burden or at least direct me somewhere that I can find information. The situation is that my husband and I combined have a taxable income in the low 6-figures. We both have the max withheld from our checks, which takes a CONSIDERABLE chunk of our money bi-weekly, yet we still wind up owing taxes! We also contribute the max to our 401k's yet, in 2006, we wound up with a bill from the wonderful IRS that consumed a full 30% of our savings. How do hard-working people get ahead with this system? We have no children, we don't own a home, and don't really want to for the time being. Is there any other way to find relief? I really feel like I'm just giving money away!

Answer 1

I wish there were something. It's possible that you could qualify to contribute to an IRA in addition to the 401K, but seems unlikely it will do you much good if you're in that high a tax bracket.
Look into pre-tax savings accounts for things like medical expenses - you might save a little bit if you are paying ANY medical, dental, vision, or prescription out-of-pocket.
Even if you don't own a home, you should look into the possibility of itemizing. You can deduct what you pay in state tax or sales tax, some medical expenses, charitable contributions, and work expenses. There are many people who can itemize, but think that since they dont' own a home they can't.
If you do your own return, I would suggest one of two things. See if you can take a tax course (too late this year, but next year maybe - they usually start in the fall). Or, make an appointment with a tax professional for a consulation. Let them look over your information and see if they can find deductions you're missing.
In answer to the question "can we get ahead", the answer is "no". The system of charging people more because they work hard and earn money is ludicrous. Albert Einstein said "The hardest thing in the world to understand is the Income Tax". He didn't mean it was difficult to calculate, but that it's an insane form of taxation, and it's hard to understand why someone would think this is a good way to create revenue for the state. You are indeed giving money away - in great part to people who don't work, and use your money to support their children. They should have to write thank-you notes to taxpayers, at the very least.

Answer 2

With an income in the low six figures, you are probably in a 25% federal tax bracket and would pay around 17-18% of your income for federal income tax, plus 7.65% for social security and medicare, plus state and local income tax. If you are already contributing the max to your 401K's, and don't want to buy a house, you're probably pretty much stuck with what you are paying. Change your W-4 to have extra taken out of each paycheck to avoid ending up owing a lot at the end of the year.

Answer 3

Well, this doesn't lower your taxes, but you can always have additional income tax withheld from your salary so you don't have a big check to write come April 15th (there is no max withholding).
If you don't already have them and your income doesn't exceed the maximum, contribute the max allowable to Roth IRAs. That won't reduce your current year's tax, but that money will earn tax-free return from that point forward.
Also, take a look at your non-retirement account savings: if you have any "high turnover" mutual funds, shift them into "tax efficient" funds or tax-free munis. That might help a bit.
BTW, I can assure you that children cost much more than they "save" in income tax exemptions!

Answer 4

I hate to say this, but as you already know, when you work for someone else, the more you make the more you pay in taxes. I went from getting $3,000 back one year to owing the next. What I have learned is that if you own your own business, there are many things you can write off on your taxes. The rich get richer becuase they know how to make the IRS happy, and not pay as much in taxes. There are many things like real estate, stocks, as you know about 401k, but I really suggest looking into researching tax breaks for businesses and corporations.

Answer 5

If you are having to send the IRS a huge check at the end of the year, with doing 401k, then there is someting really wrong with how much HR department is withholding. Make sure they aware that you are married, with only 1 deductible (yourself).

Answer 6

I would recommend reading some books written by Charles Givens. "Wealth Without Risk" and "More Wealth Without Risk" have tons of tips on saving money on taxes, and you can buy the books super cheap on www.half.com. Good luck!

Answer 7

My I suggest a home-business. For 3 years you can take certain deductions for a business that, well, just isn't doing that well in your home (Amway distributions) etc. After 3 years of loss, it's considered a hobby, and you can't deduct anymore. Charity is also great. Consider setting up a "chair" at your local univeristy.

Answer 8

Get lower paying jobs for a lower combined income (five figures). This will give you a lower tax burden, and an introduction to what life is like for the rest of us.