Question

Jim has a house payment of $2,000 per month of which $1,700 is deductible interest and real estate taxes with the remaining $300 representing a repayment of the principal balance of the note. Jim's marginal tax rate is 30 percent. What is Jim's after-tax cost of his house payment?

Answer 1

Answer:

$1,490

Explanation:

Interest expense is tax deductible in the computation of after tax cost. Therefore, Jim will enjoy tax-induced saving on the $1,700 interest portion of his monthly house payment.

Tax saving on the interest payment is computed as follows:

$1,700 * 30% tax rate = $510.

Therefore, after-tax cost of Jim's house payment

= total monthly payment, less tax saving on interest

= $2,000 - $510

= $1,490.