One Size Fits All

WARNING: This is another boring tax post. This is not advice. The writing will probably get on every English language person’s nerves.

According to the IRS, I can itemize my deductions and deduct state and local income tax or state and local sales tax. Every year I’ve filed my taxes I’ve used the standard deduction because my itemized deductions were really small. Most people that itemize their deductions tend to own property (or a business) and owning property is touted as a reason to itemize (or maybe its the other way around) and get a lower taxable income.

After yesterday’s entry I was wondering if there was a way to deduct state and local taxes…because my take home pay is a bit low and I want to have just a little less worrying about money. I assumed that the standard deduction would be $10,700 (although it could be $10,900) for 2008 so my itemized deductions have to be more than that amount.

Here is what I worked with:

The numbers are slighly off because I just took the numbers from my previous pay check and multiplied it by 26 (number of pay periods). If I add the deductions above I get a total of $11,139.46 which is more than the $10,700 so I could deduct this amount from my federal return. Will that difference of $439.46 be my refund? I don’t know. The Roth amount is from May onward, because the amounts through April will be for 2007 tax year. Additionally, the numbers will change when I and/or husband begin working in CA.

I won’t be deducting sales tax because we won’t be buying too much stuff this year that will have a sales tax. And I wonder how things are going to change with moving to a new state and city. Apparently Los Angeles has no wage tax, but CA does and it can go up to 9.3%. Hmm…I read that CA doesn’t get much Federal funding which could one reason their tax rates are so high. Or maybe its because there is a number of high income earners living in the state… I am speculating here. I did a very rough calculation and found that my take home pay in CA could be higher than my take home pay in PA by $68.54 per pay period (using the salary from Philadelphia region, not the L.A. one).

Anyway…the minimum payment for husband’s student loans is $231.06 (which will take 19+ years to pay off at that rate). If he can pay that amount every month (starting in April) this year, the interest paid will be $2,758.21. I am currently paying down my unsubsidized student loan. The subsidized student loan payments come due in June 2008, and ideally I’d like to pay off the unsubsidized portion before June. However I’m paying small amounts toward it, prioritizing saving (for move and emergency fund) for now. If we both pay into our Roth IRAs, we can get the $3,200 deduction (assuming it stays the same in 2008). So this could mean we might be able to get a higher deduction by itemize our deductions without owning any property or a business.