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I have a question that may seem obscure. We are looking to stay just under the 25% tax bracket cutoff this year so our marginal rate is 15%. So any additional dollars we earn will be taxed at 25%. My question is this, when looking at debt or investments, should I discount the rate by 15% or 25% to get the effective rate?
In other words, let's say hypothetically I earn 3.5% on savings, but I could pay off mortgage debt that is at 6%. Since the interest on the savings is taxable, then is the effective after-tax interest rate 3.0% (3.5*.85)? Since the mortgage debt is tax deductible is the effective after tax interest rate 5.1%? How does the 25% rate factor in? Would that only be for additional interest or debt?
In other words, let's say hypothetically I earn 3.5% on savings, but I could pay off mortgage debt that is at 6%. Since the interest on the savings is taxable, then is the effective after-tax interest rate 3.0% (3.5*.85)? Since the mortgage debt is tax deductible is the effective after tax interest rate 5.1%? How does the 25% rate factor in? Would that only be for additional interest or debt?