{"id":2393,"date":"2019-04-20T11:19:24","date_gmt":"2019-04-20T09:19:24","guid":{"rendered":"https:\/\/davidlebech.com\/thoughtflow\/?p=2393"},"modified":"2019-04-20T11:19:24","modified_gmt":"2019-04-20T09:19:24","slug":"tax-deductions-are-not-free-money","status":"publish","type":"post","link":"https:\/\/davidlebech.com\/thoughtflow\/tax-deductions-are-not-free-money\/","title":{"rendered":"Tax deductions are not free money"},"content":{"rendered":"\n

So you deducted your loan interest in your taxes. That means the interest was essentially free right? I could not quite figure out the answer to this question in my head recently, so I thought I would do a simple example and share it here, in case it could be useful for someone else.<\/p>\n\n\n\n

First, the conclusion: Just because an expense is deductible does not make it free. It would have been better to not have the expense in the first place.<\/em> However, if you cannot avoid the expense, then deductibles are of course great!<\/p>\n\n\n\n

Let’s say we pay $10 interest on a loan, our income is $100 and we pay 50% tax. The table below shows the scenario where our interest is not deductible, compared to the scenario where our interest is 100% deductible<\/span>1<\/sup><\/a><\/span>.<\/p>\n\n\n\n
Description<\/strong><\/td>Amount w\/o deductible<\/strong><\/td> Amount w\/ deductible<\/strong> <\/td><\/tr>
Income<\/td>$100<\/td>$100<\/td><\/tr>
Taxable income<\/td>$100<\/td>$90<\/td><\/tr>
Tax<\/td>-$50<\/td>-$45<\/td><\/tr>
Net income<\/td>$50<\/td>$55<\/td><\/tr>
<\/td><\/td><\/td><\/tr>
Interest<\/td>-$10<\/td>-$10
<\/td><\/tr>
Final income<\/td>$40<\/td>$45<\/td><\/tr><\/tbody><\/table>\n\n\n\n

In case we can deduct all of the interest, we would have $5 extra disposable income. Thus, about half of the interest in this example were “free” ($5). However, If we did not have to pay interest at all<\/em>, we would of course have $50 in final income.<\/p>\n\n\n\n

In other words, if we can completely avoid<\/em> an expense, even if it is tax deductible, that is always the best financial outcome. In practice, this is not always possible, but I think it is a good principle to keep in mind.<\/p>\n","protected":false},"excerpt":{"rendered":"

So you deducted your loan interest in your taxes. That means the interest was essentially free right? I could not quite figure out the answer to this question in my head recently, so I thought I would do a simple example and share it here, in case it could be useful for someone else. First, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[55],"tags":[219,220,195],"class_list":["post-2393","post","type-post","status-publish","format-standard","hentry","category-thoughts","tag-money","tag-personal-finance","tag-tax"],"_links":{"self":[{"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/posts\/2393","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/comments?post=2393"}],"version-history":[{"count":0,"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/posts\/2393\/revisions"}],"wp:attachment":[{"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/media?parent=2393"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/categories?post=2393"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidlebech.com\/thoughtflow\/wp-json\/wp\/v2\/tags?post=2393"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}