Question

The Wilmoths plan to purchase a house but want to determine the after-tax cost of financing its purchase. Given their projected taxable income, the Wilmoths are in the 24% Federal income tax bracket and the 8% state income tax bracket (i.e., an aggregate marginal tax bracket of 32%). Assume that the Wilmoths will benefit from itemizing their deductions for both Federal and state purposes. The total cash outlay during the first year of ownership will be $23,400 ($1,200 principal payments, $22,200 qualified residence interest payments). As a result, the annual after-tax cost of financing the purchase of the home will be $

Answer 1

Answer:

$16,296

Explanation:

Qualified residence interest payments = $22,200

Principal payments = $1,200

First year of ownership = $23,400

The annual after-tax cost of financing the purchase of the home will be :

= Installment - tax saving

= $(23,400 - $7,104)

= $16,296

Note:

Tax Saving = 32 %  of Interest amount

                   = 32% × 22,200

                   = $7,104