Question

Required information The following information applies to the questions displayed below) Javier and Anita Sanchez purchased a home on January 1, 2021, for $840,000 by paying $280,000 down and borrowing the remaining $560,000 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 32 percent. Assume the original facts, except that the sanchezes rent a home and pay $34,160 in rent during the year. what is the after-tax cost of their rental payments in 2023?

Answer 1

The after-tax cost of the Sanchezes' rental payments in 2023 remains $34,160, as they cannot deduct rent payments from their taxable income.

Step-by-step explanation:

To calculate the after-tax cost of the Sanchezes' rental payments in 2023, we must consider their marginal tax rate. As their marginal tax rate is 32 percent, the amount of money they effectively spend after taxes on rent can be computed by subtracting the tax savings from their total rent payments. This is because if they were not paying rent, they would have more taxable income.

The total rental payment for the year is $34,160. Since they cannot deduct rent payments on their taxes, the cost of rent after-tax would remain the same. However, it's important to understand that the actual opportunity cost of their money spent on rent is influenced by their tax rate since the money they spend on rent could have been otherwise subject to taxes had it been earned income. Nonetheless, in this scenario, where rent is not deductible, we do not adjust the rental payment by their tax rate.

Therefore, the after-tax cost of their rental payments remains $34,160 in 2023.