Question from Economics of public revenue Miss P has 1,000,000 baht in her bank account. Miss...

Question from Economics of public revenue

Miss P has 1,000,000 baht in her bank account. Miss P has 2 options for spending her money.

1. Buy a mutual fund and get 5 percent a year in return,
or
2. Buy a house worth 1,000,000 baht.

If Miss P borrows money to buy her house, she has to pay 7 percent in interest per year. She can deduct interest paid for her home loan from her personal income tax base. Miss P's marginal tax rate is 40 percent. Can Miss P get any benefits from tax arbitrage? How?

Solutions

Expert Solution

Yes, Miss P can get benefits from the tax arbitrage through mortgage interest deduction which is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations. This deduction is offered as an incentive for homeowners as it lowers the amount of tax owed.

Many times, homeowners can deduct the whole of their mortgage interest paid as long as they meet all requirements. The amount allowed for the deduction is reliant upon the date of the mortgage, the amount of the mortgage and how the proceeds of that mortgage are used. As long as the homeowners's mortgage matches the following criteria throughout the year, all mortgage interest can be deducted by reporting on Schedule A of the 1040 tax form.

Rahul Sunny answered 1 year ago

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