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

Video transcript

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 ten thousand dollars it is ten thousand dollars on my interest interest on interest on 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 people times that people think that since this is a tax deduction that this ten thousand dollars should be deducted from their taxes so in the previous example we showed this is the scenario where this person making a hundred thousand dollars would have to pay twenty one thousand seven hundred and twenty in taxes and so based on that misconception they would say okay I get a ten thousand dollar tax deduction now I would pay eleven thousand seven hundred and twenty and that is wrong the deduction doesn't happen from the taxes you pay the deduction happens from your stated income so if I have if this person right here had a ten thousand dollar tax deduction instead of saying that they made a hundred thousand dollars that year they would say that they made ninety thousand dollars they would say that they made ninety thousand dollars so once again the deduction does not come from 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 thousand dollars it still kind of shows up in that top bracket so the real difference is just going to be this ten thousand dollar difference before he was paying this tip he was paying twenty eight percent on this ten thousand dollars now he won't have to pay twenty eight percent on that incremental $10,000 on this incremental ten thousand dollars another way to think about it instead of this being seventeen seven 17700 fifty times 28 percent it would now be 7750 because the reported income is now only ninety thousand dollars 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 spend ten thousand if my income is deducted by ten thousand and I'm going to save twenty eight percent on that ten thousand you can just subtract two thousand eight hundred from this but just to show you how it'll all work then it all works out to the same thing let's just go through the same calculation again we have seven thousand seven hundred fifty times 0.28 plus 48 thousand three hundred times 0.25 plus twenty-five thousand six hundred times 0.15 plus eight hundred and thirty-five dollars and it's 18 thousand nine hundred and twenty dollars so now the taxes will be eighteen thousand nine hundred and twenty dollars and as you can see the difference between the old and the new is exactly twenty eight hundred dollars because that's that's essentially what the amount that we would be taxed on that ten thousand dollars if we had made that much money anyway hopefully that doesn't confuse you too much