You have accepted employment in Massachusetts at an annual starting salary of $67,000. Your company allows you to contribute up to 8% of your salary to a thrift plan and will match 75% of your contribution. For your federal income tax you can use a standard deduction of $5,700 and a personal exemption of $3,650. Social security is 6.2% and Medicare 1.45%. For Massachusetts tax you can deduct a personal exemption of $4,125 and a social security deduction of $2,000. The tax rate on Massachusetts income is a flat 5.3%, the federal tax rates for single persons are given in the excerpt below.
Using this information, calculate:
Part A, using the standard deduction:
1. Your weekly payroll stub (gross pay, FWT, MWT, FICA and Medicare, take-home pay) for:A. Participating in the thrift plan
B. Not participating in the thrift plan
2. The reduction in take-home pay when you participate in the thrift plan
3. The weekly deposit to your thrift plan, including the company’s contribution
4. Assuming a 3.20% annual salary growth and a 45 year career with this company, the final accumulation in your thrift plan for an annual interest rate of 6%
Part B, using itemizing deductions:
It is advantageous to use the standard deduction unless you can itemize sufficient deductions to exceed the $5,700 listed above as the standard deduction for individuals doing their federal income tax. Your personal exemption remains at $4,125 and the itemized deductions cannot be used in your Massachusetts income tax. If you bought a home and took out a 25 year mortgage for $175,000 at 4%, you would probably exceed the standard deduction with the interest alone. You can also deduct real estate taxes, assumed to be $2,750, the Massachusetts income tax calculated above, auto excise tax (assume $400), charitable contributions (assume $500). These changes do not affect your Massachusetts income tax.
Recalculate 1 and 2 from Part A using the itemized deductions described in Part B instead of the standard deduction (3 and 4 in Part A are not affected by itemizing deductions).
In summary, your itemizing deductions for the year will be:
a. Mortgage interest (use first year’s interest)
b. Real estate taxes
c. Massachusetts income tax
d. Automobile excise tax
e. Charitable contributions (church, alumni funds, March of funds, etc.)