As you probably know, you definitely are above the IRS standard deduction amount of $10,600, reference IRS Pub 501. So itemizing is not a problem, if you choose to do so, reference IRS Publication Instructions for Schedule A/B.
As for your TSP contribution the maximum contributions for 2007 is $15,500, and if I remember correctly it increases by $500.00 each year, so, 2008 will be $16,000.
Now the key thing to remember about TSP contributions is that it is tax deferred. Basically it means whatever you put in each month reduces your tax liability for that time period. When you start to take the monies out, then you are taxed, and hopefully in a lower tax bracket.
As an example and using very round numbers.
Monthly incomes are $5000.00 (and does not change throughout the year) and let us assume 5% is taken out for taxes. Therefore, you pay $250 in taxes per month.
Let’s throw the TSP into the equation.
Monthly income is the same, $5000.00 and taxes remain the same 5%, but you elect to have 10% of your monthly income placed into the TSP. Remembering that your TSP deduction is tax-deferred, then your taxable monthly income becomes $4500.00 ($5000.00 x 10% TSP = $500.00).
Therefore, the 5% tax is only applied to the $4500.00, which means $225.00 is taken out for taxes.
Basically you’ve saved $25.00 in taxes per month ($300.00 annual). This is great on this end, but remember that you still have to pay taxes when you take a distribution. What tax planners normally espouse is that when you do starting taking distributions in your retirement years, your annual income will be less and therefore how much you pay in taxes will be less.
Lastly, you mentioned your W-2 and how much should be taken out in taxes. This can be a tough topic, but it happens that the IRS has gotten a bit more customers friendly. They now have the IRS Withholding Calculator (also reference IRS Publication 919): http://www.irs.gov/individuals/article/0,,id=96196,00.html
There are many thoughts that people have to their tax withholdings, and some examples are:
1a. I want more taken out so that I get a big check (refund). Now I can use this money for something I need. My take. Interest free loan to the government, since, they do not give you interest on the excess money you allow them to take. Startup a “Christmas-fund” with your bank, most have something of this sort.
1b. I do not ever want to owe monies, since, if I do it too many times, I may suffer a tax penalty for not having enough withheld. My take. This individual has paid the penalty previously.
2. Each year I make an assessment so that I neither owe nor pay, or, it is within $100.00 either way. My take. Best option, but extremely time-intensive in analyzing your budget.
Finally, I would recommend that if you have the time, to research the information with the source, the IRS. Everything that I’ve mention is based upon source documents from the IRS: http://www.irs.gov
NOTE: I do not work for the IRS. I have no affiliations with IRS. I do volunteer work on my installation as a tax preparer, and our training and certification was by the IRS (not H&R Block).
Remember and use IRS Publication 17. It has almost everything in it and with references to other backup publications.