Hi,

I’ve just started working in NYC and living in NYC. From some research, I understand I need to pay federal, NY State, and NY City taxes on my gross income after adjusting/deducting the gross income for some exemptions and deductions. Also understand two options under deductions exist – standard and itemized. A few questions:

1. Can the tax paid on the NY State or City tax return be claimed as a deduction (or better still a tax credit) against gross income (or taxes payable) on federal return? If so, where would you use it – as part of itemized deductions or in addition to standard deductions if am using standard deduction method.

2. What is the effective tax rate (all three fed, state and city combined) on an income of 100K per annum and 200K per annum? – under married filing jointly and using standard deductions?

3. When is it more beneficial to use itemized deductions relative to standard?

4. Which is better –married filing jointly or as separate singles?

Thank you.

New2NYC:

1) Yes, you can claim both the NY state and NYC income taxes withheld as a deduction, but only if you have enough deductions to itemize (Schedule A). Assuming you are Married Filing Jointly, your standard deduction will be $10,000 for 2005. Hence, your withheld state and local income taxes, when combined with other itemized deductions (mortgage interest, other taxes, charitable donations, miscellaneous deductions) will be deductible only if they in toto exceed $10,000.

2) Your federal marginal tax rate (that's the tax rate for the last dollar you earned in 2005) for $100K for a single person is 25%; for $200K, the federal marginal tax rate is 33%. Doing a strawman return using 2004 tax software, your combined taxes (federal, state and NYC) is $32,963 for a percentage of just under 33%. For $200K, your combined taxes (federal, state and NYC) is $64,924 for a percentage of just under 32.5%.

3) See Item #1 above.

4) Generally, for the past three years, ling Married Filing Jointly is about the same as filing separate Single returns.

Thank you, AtlantaTaxExpert. Your responses are of great help.

A question on your response on effective tax. Assuming the marginal tax rate for 200K is 33%, and for 100K is 25%, how is it possible that the effective tax rate in your calculation is close to 32.5% for both scenarios. I notice for 200K, the tax percentage (64K/200K) in your calculation is slightly less than the tax % on 100K. I'd thought the tax would be more under a progressive system.

Also, how would the social security and medicare tax impact on the total tak and effective tax rate? Or did you include those in your calc?

Regards and thank you again.

New2NYC:

The figures I gave you are based on strawman returns using 2004 tax software. Now, the top end of the 25% tax bracket is $182,800, which means only $17,200 is subject to 33%, and that's before a $10,000 standard deduction and almost $6,500 in personal exemptions. This means that, effectively, all but about $1000 of the $200K is taxed at the 25%tax level.

I did not include Social Security and Medicare taxes. Only the first $90,000 (I believe) is subject to the Social Security tax of 6.2%. All of your income is subject to the Medicare tax of 1.45%. Do the math!

Thank you very much for the clarification, AtlantaTaxExpert

That's what I am here for!