I live in D.C., and I can tell you it gets quite crowded. But, the fireworks are great and there definitely is a lot to do. There also are a lot of places you can see the fireworks from without necessarily being right at the Washington Memorial. It will just depend on how close to the "action" you want to be.
In terms of where to stay, it really depends on how close you want to be. Vienna and Rockville are pretty good hikes to get in--a good 45-50 minutes by train. If you are willing to be that far out, though, you can also check out Gaithersburg, MD. There is an area called Rio Center which is actually pretty nice, and Marriot's headquarters are right there. Not surprisingly, there are a number of Marriot hotels near the headquarters.
Closer in, I agree with pmbuko--Bethesda is a good choice. "Downtown" Bethesda is nice and has good restaurants. Another area you can check is the Crystal City/Pentagon City part of Virginia. They are right across the bridge from D.C., Metro convenient, and have a bunch of hotels. Crystal City has a sort of poured concrete feel to it, but in my view it is nice enough and I am sure the suburbs aren't what you'd be making the trip for.
My wife volunteers at the White House visitor center here, and as a result knows a lot about D.C., things to do, etc. If there are any questions you have, I am sure I can get them answered!
