Question

The Wilmoths plan to purchase a house but want to determine the after-tax cost of financing its purchase. Given their projected taxable income, the Wilmoths are in the 24% Federal income tax bracket and the 8% state income tax bracket (i.e., an aggregate marginal tax bracket of 32%). Assume that the Wilmoths will benefit from itemizing their deductions for both Federal and state purposes. The total cash outlay during the first year of ownership will be $31,600 ($3,160 principal payments, $28,440 qualified residence interest payments).

If required, round your interim calculation to nearest dollar.

As a result, the annual after-tax cost of financing the purchase of the home will be $___________

**SHOW WORK AND EXPLAIN**

Answer 1

solution
given
The Wilmoths plan to purchase a house but want to determine the after-tax cost of financing its purchase.
Given
their projected taxable income, the Wilmoths are in the 24% Federal income tax bracket and the 8% state income tax bracket (i.e., an aggregate marginal tax bracket of 32%).
Assume that the Wilmoths will benefit from itemizing their deductions for both Federal and state purposes. The total cash outlay during the first year of ownership will be $31,600
Interest tax shild = interest payment*tax rate

Interest tax shield = 28440*32% = 9100.8

annual after tax cost of financing = interest payment-interest tax shield

28440 - 9100.8 = 19339.2