Javier and Anita Sanchez purchased a home on January 1, 2015, for $500,000 by pa
ID: 2765572 • Letter: J
Question
Javier and Anita Sanchez purchased a home on January 1, 2015, for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. The Sanchezes’ marginal tax rate is 30 percent.
What is the after-tax cost of the interest expense to the Sanchezes in 2015?
after-tax cost of the interest expense: ????
Assume the original facts, except that the Sanchezes rent a home and pay $21,000 in rent during the year. What is the after-tax cost of their rental payments in 2015?
After-tax cost of the rental payments: ????
Assuming the interest expense is their only itemized deduction for the year and that Javier and Anita file a joint return, have great eyesight, and are under 60 years of age, what is the after-tax cost of their 2015 interest expense?
After-tax cost of the interest expense: ???
Javier and Anita Sanchez purchased a home on January 1, 2015, for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. The Sanchezes’ marginal tax rate is 30 percent.
Explanation / Answer
a)
Principle Amount of Loan = 300,000
First five year payment is Interest only
Annual Interest payment (300,000 * 7 %) = 21,000
Marginal tax rate = 30 %
Aftertax cost of Interest : 21,000 *0.7 = 14700
b)
As the rental payments are non deductible, they could not generate any savings in tax. Hence the before as well as after tax for the rental payments would be same.
c)
Description Amount Explanation (1) Before-tax interest expense 21,000 300,000*0.07 (2) Standard deduction 12,400 M.F.I (3) Interest in excess of standard deduction 8,600 (1)-(2) (4) Marginal Tax rate 0.30 (5) Tax savings from interest expense 2,580 (3)*(4) After-tax cost of Interest Expense 18,420 (1)-(5)Related Questions
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