If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains ***.kastatic.org** and ***.kasandbox.org** are unblocked.

Main content

Current time:0:00Total duration:3:30

In this video, I
now want to cover one of the other most
misunderstood ideas when people think
about taxes, and that's the idea of deductions. So, one of the most
common tax deductions is the deduction you get on
interest on your mortgage. So let's say that this year
on my mortgage-- of the part of my mortgage that is interest,
let's say it's $10,000. It is $10,000 on my
interest on my mortgage. And you'll either already
know or someone might tell you that this is tax deductible. And the misconception that
I've seen many, many times is that people think that
since this is a tax deduction, that this $10,000 should be
deducted from their taxes. So in the previous example,
we showed the scenario where this person
making $100,000 would have to pay
$21,720 in taxes. And so based on
that misconception, they would say, OK, I get
a $10,000 tax deduction, now I would pay $11,720. And that is wrong. The deduction doesn't happen
from the taxes you pay. The deduction happens
from your stated income. So if this person right here
had a $10,000 tax deduction, instead of saying that they
made $100,000 that year, they would say that
they made $90,000. So once again, the
deduction does not come directly from the taxes. That would be a tax credit. The deduction comes from
the reported income. So what would be the
actual effect on the taxes? Well, we just have to
look at this $90,000. It still kind of shows
up in that top bracket. So the real difference
is just going to be this $10,000 difference. Before, he was paying
28% on this $10,000. Now he won't have to pay 28%
on that incremental $10,000. Another way to think about it,
instead of this being 17,750 times 28%, it
would now be 7,750. Because the reported
income is now only $90,000. So the actual number-- we
can get our calculator out and just calculate it. There's two ways
you could do it. You could just say, look, if
I'm going to have spent 10,000-- if my income is
deducted by 10,000, and I'm going to save
28% on that 10,000, you could just subtract
2,800 from this. But just to show you
how it'll all work, that it all works out
to the same thing, let's just go through the
same calculation again. We have 7,750 times
0.28 plus 48,300 times 0.25 plus 25,600
times 0.15 plus $835. And it's $18,920. So now the taxes
will be $18,920. And as you can
see, the difference between the old and
the new is exactly $2,800 because that's
essentially what the amount that we would be
taxed on that $10,000 if we had made that much money. Anyway, hopefully that
doesn't confuse you too much.

Personal finance brought to you with support from Better Money Habits® Powered by Bank of America® Bank of America, N.A. Member FDIC. Equal Housing Lender. Investment Products: Are Not FDIC Insured, Are Not Bank Guaranteed, May Lose Value