How do you calculate how much tax savings there is by deduction the interest?
2007-07-30 10:53:28 · 8 answers · asked by JustWanaKnow555 2 in Business & Finance ➔ Personal Finance
You have to know your income tax bracket to do an accurate calculation, but I can show you an example:
If you're in the 25% bracket, you multiply 7.9% by 75% to find out how much interest you're paying when taking the deductibility into account. So 7.9% deductible equates to 5.9% non-deductible (in the 25% tax bracket).
2007-07-30 11:00:10 · answer #1 · answered by Kathryn 6 · 0⤊ 0⤋
I will assume you tax bracket to be 25% federal and 6% state. 7.9% X .69 = 5.45%. That would be your after tax cost for the home equity loan. Of course 5.45% interest is lower than 6.51% but there may be other considerations.
The car loan is secured by the car. The worst thing that could happen is that they repossess the car. On a home equity loan, when you do not pay, they take your home. Please check with your tax counsel that the home equity loan is tax deductible for your purposes.
2007-07-30 18:04:02 · answer #2 · answered by William H 5 · 0⤊ 0⤋
calculation would be rate on home equity times (1 minus your tax bracket). So if you are in a 15% bracket, then would be 7.9% x .85 or 6.715 for the effective rate of the home equity loan after the tax savings. So in that case, the separate car loan would be better. If your bracket is higher than the 15%, then the home equity loan might cost less, but you are putting your home at risk if you can't pay it.
2007-07-30 18:11:42 · answer #3 · answered by Judy 7 · 0⤊ 0⤋
Since the entire 7.91% interest is deductible from your income, you will save the % of 7.91%, that you pay in % of tax.
The auto loan is 1.39 % less than the equity interest, but cannot be deducted from your income.
If you are in a 15% tax bracket, you save 15% of the interest @7.91%. You save approx. 1.19 % of the interest.
The car loan is a little over by 2/10 of one percent of the interest.
If you are in a 20% tax bracket, you save approx 1.58% of the interest. That's a plus in savings by .39%, about 4/10 of one percent of the car loan interest, saved.
I probably would do the equity loan. Paying cash, you might dicker for a lower price. You have to be tough and ready to walk away if they don't deal. It's a new model year, right now.
Bear in mind that the dealer earns a kickbak on loans. They don't like cash deals.
Hope this helps.
2007-07-30 18:33:03 · answer #4 · answered by ed 7 · 1⤊ 0⤋
Definitely the 7.9 deductible home equity loan. You can get 6.5 on a car loan at any credit union with decent credit.
2007-07-30 17:56:28 · answer #5 · answered by Body by BBQ 2 · 0⤊ 0⤋
Assuming the fees are the same,
x = your tax rate
7.9* x = 7.9-6.51
x=1.39 / 7.9
x=.176
x=17.6%.
If your tax rate is >17.6% go with the home equity, if lower go with the car loan.
2007-07-30 18:05:26 · answer #6 · answered by Slumlord 7 · 0⤊ 0⤋
edward I gave the best calculation so far. The BEST answer is, if you pay off ALL your debt, you are better off than deducting any interest.
2007-07-30 19:12:51 · answer #7 · answered by STEVEN F 7 · 0⤊ 0⤋
no car loans are smart/good because cars lose value like a rock. todays new car bought at $20,000 will be worth about $8,000 in four years.. :(
2007-07-30 17:59:13 · answer #8 · answered by Anonymous · 0⤊ 0⤋