Q What can a single person do to reduce his tax liability?
You might have heard the adage, "It's not how much you earn, it's what you keep."
While you might earn $40,000, it's the value of your deductions that determine your taxable income.
As a single person, if you earn the majority of your income through your employer, there is no substantial change you can make -- other than moving to South Dakota, where there is no state income tax.
Assuming that moving is not an option, you should ask yourself these questions:
How much can I save to my 401(k), or similar plan? You can contribute the higher of 100 percent of income or $14,000. This amount reduces your income dollar for dollar.
Does my employer offer a flexible spending account? You can pay for eligible medical expenses on a pretax basis.
Do I own a home, or do I have the ability to purchase a home? Home ownership allows for the deduction of mortgage interest paid and real estate taxes.
Am I charitably inclined? You can deduct gifts of cash or stock to charities, as well as clothing and household items.
Do I have unreimbursed employee expenses? Keep in mind that these expenses must be above a certain threshold based on your income to qualify for a deduction.
Do I own a business or have interest in starting one? You can offset your self-employment income with related business expenses, as well as other expenses, such as half of your health insurance premium. Don't forget about saving to your retirement plan under this scenario, as well.
Even if there is nothing substantial to change, there are usually things you can do to tweak your income and deductions to reduce your tax liability.
Kristin Hannemann, CFP (30)
Ka-Ching's financial experts at Edina-based Accredited Investors Inc. can be reached at email@example.com.