Understanding the Mathematics of Personal Finance
DEDUCTIBLE INTEREST
The calculation of the amount of tax you don’t have to pay if you can deduct some interest is the same calculation as for the tax on taxable interest; you subtract the results from your taxable income rather than adding the results to it.
For example, suppose your taxable income is $100,000, which (same tax table as above) would result in your owing approximately $17,700 in taxes. If you have a sizeable loan such as a home mortgage, you might have paid $10,000 in interest over the course of the year. If you can list this interest as a deduction, your taxable income drops to $90,000 and your tax drops to approximately $15,200. This is a saving of $17,700 - $15,200 = $2,200 in tax.
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Assuming that your loan is at 6% interest, we can approximate an effective interest rate by imagining that we ’ re repaying the tax savings to the loan, and therefore
