Question

In: Accounting

At the end of September 2019, Dave takes out a 15-year $100,000 mortgage with level monthly...

At the end of September 2019, Dave takes out a 15-year $100,000 mortgage with level monthly payments beginning at the end of October 2019.

Interest is charged at a nominal rate of 4.8% convertible monthly.

Each year, Dave will be able to claim a tax deduction for interest payments on the loan.

What will Dave’s tax deduction be for calendar year 2023? Possible answers are: 3,912 or 4,800 or 3,856 or 3,934 or 4,226. Thanks

Solutions

Expert Solution

Loan Borrowed P = 100,000

Interest I = 4.8% per annum compounded monthly. Thus 4.8%/12 = 0.4% per month.

N = 15 years ie 15*12 months = 180 months.

Thus Monthly level payments = 100,000/(Present Value of n = 180, i = 0.4%)

Ie, 100,000/128.137 = 780.42 (Using excel)

Thus, we pay a total of 780.42 per month or 780.42*12 = 9,365 per annum which include interest and principal. Thus for 2023, the bifurcation is as follows: (Using EMI calculators or excel sheet)

Thus Interest of $ 3,912 is paid. Hence Option A is correct.


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