I’m formulating a debt rebate plan, as well as a single of a questions we have is this: is it improved (financially) to discharge debt debt prior to tutorial loan debt? we wish to compensate a slightest volume of seductiveness so we would consider a aloft seductiveness rate (mortgage) is what we should pay. However, there have been taxation advantages to both debt debt as well as propagandize loan debt, as well as I’m not certain if we would be blank out upon improved taxation advantages by gripping debt debt until we have separated propagandize loan debt.
Any recommendation is appreciated.
If the interest rates are similar and if the total interest paid per year for education is $2,500 or less, and if your income qualifies you for the school loan interest adjustment, then education is the better debt to have. Why?
1) A lot of tax law depends on your Adjusted Gross Income. (AGI). Having a lower AGI helps with other things on your tax form (the 2% and 7.5% thresholds on Schedule A, Earned Income Tax Credit, Daycare Credit, IRA contribution limits, tons of stuff). Even though both lower your taxable income, eduactional debt lowers your AGI whereas mortgage interest does not.
2) Sometimes you don’t have enough items on Schedule A to use it, so you end up taking the standard deduction. If your standard deduction is $10,000 and everything else on the Schedule A adds up to $8,000, then the first $2,000 of mortgage interest saves you $0 in taxes.
These are basic thoughts. Like others have said, the only way to know for sure is to do your tax return both ways and compare the tax liability savings versus what you lose in interest. Thanks to the complicated system of taxation we have, there simply is no easy answer. A good first step would be to go back to your ’06 tax return and play with the numbers since the ’07 software isn’t yet available.
You have to run the numbers both ways (make out 2 tax returns) to find the answer to this for your own particular situation.
The answer is comprised of how much you pay in interest plus how much you pay in taxes, each way.
The only differences between mortgage debt and education loan debt is how you claim them.
1. Mortgage debt is claimed through itemized deductions, so if you don’t have enough mortgage interest along with all of the other itemized deduction like property tax, state and local income tax, donations, then you will not be able to itemize your deductions and would have settle for the standard deductions.
2. Education interest is a separate deduction. You can deduct it no matter how many other deductions you have.
While the education interest rate is lower, the additional deductions that you get because you have mortgage interest might negate the higher interest rate.