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```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
(http://www.irs.ustreas.gov/) 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 dollar I pay in mortgage interest, my deduction will refund
\$.28 to me.  In other words, I am only really paying \$.72 of each dollar
(or 72%) of my interest cost.  So, my after-tax APY is 72% x 7.229% =
5.205%.  I now have a number I can use when deciding whether to invest or
pick a debt to pay.

Tax Credits and Complex Deductions
Tax credits are nicer than deductions, in that you get all of your money
back, at least up to some kind of limit.  In general, they're a great
advantage.  Unfortunately, it's much harder to use a general method to account
for credits.  Same thing goes for more complex deductions that let you deduct
up to a certain dollar limit.  For example, suppose you have a school loan,
but can only deduct some of the interest you pay.  It may make sense for you,
then, to put some money toward the school loan to lower the interest to the
point where you can deduct as much as possible.  If prepaying the loan will
allow you to deduct all interest before the year is up, then you may want to
switch your prepayments to another obligation with a higher interest rate.  In
cases like this, I use my spreadsheet and save several versions representing
different scenarios.  Keeping my eye on Net Worth will tell me which scenario
is best.

Capital Gains
This is brand new to me, but I'm pretty sure I get it.  I haven't actually
cashed out any of my investments before, so I haven't been through the wringer
yet.  However, I believe the general idea is that short-term (held less than
one year) capital gains on stock-type investments are taxed as regular income,
and long-term gains are taxed at 10% (for 15% tax bracket) and 20% (for 28%
bracket).  Let's forget about collectibles and all that other junk for now.

Anyway, being fairly solid in the 28% bracket, I assume that any short-term
capital investments I make will be taxed at 28%, and long-term investments will
be taxed at 20%.  The math is very similar to that for simple deductions.
First, calculate the APY, and then adjust by the tax factor.  For instance, I
used an example in an earlier Rule that had an index fund return at 7.56%.  I
calculated that by assuming a 10.5% return taxed at a short-term rate of 28%.
0.28 x 0.105 = 0.0756, or 7.56%.  If I held such an investment for more than a
year, it would be taxed at 20% and my return would be a little better (8.4%).

More Complicated?
OK, so what if we have to worry about variable rates and timeframes and dollar
limits and a bunch of other ugliness?  Well, we can solve any math problem if we
beat our head up against it long enough.  I do so using my gigantic budget
spreadsheet.  Generally, I find it easier to plug in a bunch of numbers and look
at Net Worth than to try and devise a precise set of equations to fit every
scenario.  But keeping interest rates in mind is always a great place to start.

Hope you've enjoyed these Rules.  I'm nearly done, I think.  I'd like to write
one on Emergency Planning and perhaps a Summary, but I think that's about it.

Until next time, Fool On!
SpeleoFool.
```

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