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Subject:  SpeleoFool's Rules - Tax Math 101 Date:  11/16/1999  1:11 PM
Author:  SpeleoFool Number:  19889 of 310619

Hi Fools,

If you're new to the SpeleoFool's Rules series, check out my Introduction 
(post #18962) or Previous Rules (below).

Well, it's not April 15th, but it is tax time.  At least for my Rules series.  
I hope this doesn't come as too much of a disappointment, but my discussion 
of taxes is largely going to be a "punt."  While I could talk all day about 
different tax rules and strategies, it's far too complicated a topic.  Plus 
it has its own board.  More importantly, I'm not an expert by any means.  
Please visit the Tax Strategies board or the IRS webpage at 
( for specific tax information.

What I will cover in this post is how to do the math for taxes, once you know 
what you're up against.

Previous Rules
Interest Rates      - post #18966
Net Worth           - post #19025
Debt Priority       - post #19189
Debt vs. Investing  - post #19580
APR vs. APY         - post #19719, #19741 (original post has math errors!)

Simple Deductions
One of the most common impacts of tax on finances is the deduction.  The 
effect of deducting $x is that you do not have to pay tax on that money.  
Unless you are very near the cutoff point for your tax bracket, you can 
generally use that number to calculate a "rebate" on your deduction.  I'll 
use some mortgage numbers to demonstrate the effective after-tax impact of 
deductible mortgage interest.

Mortgage APR = 7.0%, compounds monthly, I am in 28% tax bracket.

1. First calculate the APY.  This is how much interest I will accumulate in 
   one year.  APY = 7.229% (see APR vs. APY Rule for how to calculate this).

2. Now, for each