Question

javier and anita sanchez purchased a home on january 1, 2023, for $732,000 by paying $244,000 down and borrowing the remaining $488,000 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. What is the after-tax cost of the interest expense to the Sanchezes in 2020? (Round your intermediate calculations to the nearest whole dollar amount.)

Answer 1

Javier and Anita Sanchez's after-tax cost of the interest expense on their home loan in 2023 is $23,228.80. This is calculated by deducting their tax savings from the total interest payment which is influenced by their 32% marginal tax rate.

Step-by-step explanation:

The after-tax cost of the interest expense to Javier and Anita Sanchez for their home purchased on January 1, 2023, can be calculated as follows:

• The total annual interest payment without taxes is the loan amount multiplied by the interest rate, which is $488,000 multiplied by 7%, equaling $34,160 per year.
• To find the after-tax cost, we reduce the interest payment by their marginal tax rate, which is 32%. So, the tax savings from the interest deduction is $34,160 multiplied by 32%, which equals $10,931.20.
• Subtracting tax savings from the annual interest payment, the after-tax cost is $34,160 - $10,931.20, which equals $23,228.80.

Thus, the after-tax cost of the interest expense for the year 2023 for the Sanchezes is $23,228.80.