Question

Isabelle (a single taxpayer) contributes $7,000 annually to her church. In addition, she owns a home...

Isabelle (a single taxpayer) contributes $7,000 annually to her church. In addition, she owns a home in which she has $22,000 equity, and she itemizes deductions. If she pays $12000 interest on credit cards, $7,500 interest on her home equity loan, and is in the 26% marginal tax bracket, calculate Isabelle's tax savings from these interest payments.

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Answer #1

First, we need to check what are the items that are eligible for itemised deductions.

In this case, the $7,000 contibuted to church and the $7,500 paid as interest on her home equity loan is eligible for itemised deductions. Thats a total of ($7,000 + $7,500) = $14,500. This amount is deductible from the the adjustible gross income and the net becomes her taxable income. So, she doesn't need to pay tax on this $14,500. And had she paid tax, the amount would be 26% of $14,500. This also equals her tax savings. Lets calculate that below -

Isabelle's tax savings = 26% of $14,500

= (26/100) * $14,500

= $3770

Note : We will not consider the interest on credit card as tax deductible, because interest on personal loans are not tax deductible according the the IRS.

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