If someone with a lot of taxable deductions has two loans for $10K each, and the first is tax-deductable at 6.9% (student loan) and the second is a car loan at 5.9%, which would be better, financially speaking, to pay off first?
I thought the car loan but was not sure. Any input would be appreciated.
Would depend on what your tax rate is, and whether you can actually use those deductions. Assuming you wouldn't get hit by AMT, and you can in fact claim the student loan interest deduction (i.e. your income is low enough), then paying off the car loan is probably the best way to go.
Assuming you're paying a 28% marginal tax rate, (i.e. if you earned an extra $100, the IRS would take $28), then you're paying $590/year (10,000*0.59=$590) in after-tax interest on the car loan, but only 10000*.069*(1-.28)=$497 in after-tax interest on the student loan, so, on an after-tax basis, you save about $93 in annual interest by paying off the car loan instead of the student loan.
I think it's a 25% annual tax rate. Income is about 55K a year. There are a lot of other deductions such as home mort. interest and business expense so yes the deductions can be used.
Xnarg
Senior Member - 5K
posted: Nov. 14, 2009 @ 5:20p
Keep in mind that the student loan interest deduction starts to phase out with an MAGI of $55,000, so as your income goes up, the interest deduction has less of an impact.
The deduction is phased out completely when MAGI reaches 70,000. Once again, we punish people for doing well.
Not only that, but the maximum amount of deductable interest is $2500. At the highest marginal rate before the partial phaseout (AGI of $54,999), the maximum value of the deduction is $625.
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