Calculating Loan Interest Deduction

[albanga]

Hey All,

If simple enough to explain, what is the formula for calculating the interest tax deduction on a loan annually.

Using an example of a 100k investment loan on IO over 30 years at 5% interest and say your on a middle tier tax bracket at 37 cents.

On my calculation the interest paid is $5000 annually.
So would the tax deduction be 5000*37% = $1850

Or am I way off and need to consider other variables?

 

[Peter_Tersteeg]

The calculation you've used is about as good as it gets for predicting interest.

For the actual interest paid I have a really easy method for determining the interest I've paid on my loans for my tax returns, it works for both interest only and principal & interest loans...

I call the bank and ask, "How much interest did I pay on this account?" I had this figure to my accountant.

 

[Terry_w]

That formula is correct, but don't forget the rent is income.

 

[Paul@PFI]

Hey All,

If simple enough to explain, what is the formula for calculating the interest tax deduction on a loan annually.

Using an example of a 100k investment loan on IO over 30 years at 5% interest and say your on a middle tier tax bracket at 37 cents.

On my calculation the interest paid is $5000 annually.
So would the tax deduction be 5000*37% = $1850

Or am I way off and need to consider other variables?

Calculating interest yourself for a tax deduction suggests a problem to start with. Interest is generally incurred and paid on a loan and the bank issues statements. Generally its charged monthly as a debit to the account. Add these up. If its prepaid there would likely be a lump sum also / instead. So the interest is a matter of fact rather than a calculation.

If apportionment is a concern (a problem) then you will have determined that X% of the annual amount is deductible. Again easily calculated.

A question asking how to calculate the deduction suggests a bigger concern that requires advice. If disputed the ATO doesn't adjust the amount. They disallow it in full and allow you to object and demonstrate a reasonable basis.

If you are estimating for projections your basis would be close enough to calculate the interest cost. The deduction is not 37% of that....The deduction of $5k reduces assessable income so that the final income tax refund attributable to the interest may well be at a marginal rate of between 34.5% and 49%. The item in bold above is factually incorrect.

 

[Rob G.]

On my calculation the interest paid is $5000 annually.
So would the tax deduction be 5000*37% = $1850

No. Slight terminology issue.

The tax deduction is the interest expense $500.

The effective saving after tax to you by the fact that the amount is deductible is based on your marginal tax rate, i.e. $500 x 37% = $1850.

 

[albanga]

Thanks for such great speedy replies all.

Paul this is just for my own general knowledge and yes for a little bit of future estimate. Of course I would ALWAYS get expert advice at tax time.