Deductable Interest?

Question

if interest is deductable, why would the interest rate matter?

Answer 1

For your individual return the only interest that is deductible is for a loan that is secured by your personal real estate. When you take that deduction you reduce your taxable income. That means that you don't pay tax on the money that you pay the interest with. If you are in the 15% tax bracket you save $15 for ever $100 you pay in interest. If your interest rate was cut in half you would pay $7.50 tax on $50. You would be ahead by $42.50

Answer 2

It seems from your question that you think a deduction reduces your taxes dollar for dollar. That is not the case. If you deduct $100 in interest and are in the 15% tax bracket, your taxes are reduced $15 but you still have to pay $85.

So, the higher the interest rate, the more it costs you even if it is deductible.

Answer 3

The higher the rate, the higher the interest and therefore the greater the deduction.

There may also be negative tax consequences if you make or receive a below-market rate loan to or from a relative in some circumstances.

Answer 4

Only interest on a mortgage is deductable for most people. You are not going to get the interest payment back in full by reducing your income by it. The more interest you pay the less you have to spend on other things. That is why the stock market closely watches the FED rate; it indicates the interest cost consumers will be subject to and whether or not it it will cause them to spend or invest.

Answer 5

First of all, not all interest is deductible, only mortgage interest. And even that is only if you itemize, which not everyone does. And a deduction doesn't pay you back for all you spent, only a percentage of it.