Questions: The rent on an apartment you like is 1650 per month. The monthly mortgage payment for a house you like would be 2000, of which approximately 1750 would go toward interest. Decide whether your monthly expense would be higher for the apartment or the house in the following cases. Assume you are single and assume the 2021 value of 12,550 for the standard deduction. Complete parts (a) and (b). a. You are in the 24% tax bracket, and besides the mortgage interest deduction, you also have deductible expenses of 4700 for charitable donations and 8700 for state and local taxes. It is cheaper to , with a monthly expense of . (Round to the nearest dollar as needed.)

The rent on an apartment you like is 1650 per month. The monthly mortgage payment for a house you like would be 2000, of which approximately 1750 would go toward interest. Decide whether your monthly expense would be higher for the apartment or the house in the following cases. Assume you are single and assume the 2021 value of 12,550 for the standard deduction. Complete parts (a) and (b).
a. You are in the 24% tax bracket, and besides the mortgage interest deduction, you also have deductible expenses of 4700 for charitable donations and 8700 for state and local taxes.

It is cheaper to , with a monthly expense of . (Round to the nearest dollar as needed.)

Transcript text: The rent on an apartment you like is $\$ 1650$ per month. The monthly mortgage payment for a house you like would be $\$ 2000$, of which approximately $\$ 1750$ would go toward interest. Decide whether your monthly expense would be higher for the apartment or the house in the following cases. Assume you are single and assume the 2021 value of $\$ 12,550$ for the standard deduction. Complete parts (a) and (b). a. You are in the $24 \%$ tax bracket, and besides the mortgage interest deduction, you also have deductible expenses of $\$ 4700$ for charitable donations and $\$ 8700$ for state and local taxes. It is cheaper to $\square$ , with a monthly expense of $\$$ $\square$ . (Round to the nearest dollar as needed.)

Solution

Solution Steps

To determine whether the monthly expense is higher for the apartment or the house, we need to calculate the after-tax cost of each option. For the house, we can deduct the mortgage interest and other deductible expenses from the taxable income, which reduces the tax liability. We then compare the effective monthly cost of the house with the rent of the apartment.

Calculate the total deductible expenses, including mortgage interest, charitable donations, and state/local taxes.
Determine if the total deductions exceed the standard deduction. If so, use the itemized deductions; otherwise, use the standard deduction.
Calculate the tax savings from the deductions by applying the tax bracket percentage.
Determine the effective monthly cost of the house by subtracting the tax savings from the monthly mortgage payment.
Compare the effective monthly cost of the house with the apartment rent to decide which is cheaper.

Step 1: Calculate Total Itemized Deductions

The total itemized deductions consist of the mortgage interest, charitable donations, and state/local taxes. We calculate this as follows:

\[ \text{Itemized Deductions} = \text{Mortgage Interest} + \text{Charitable Donations} + \text{State and Local Taxes} \]

Substituting the values:

\[ \text{Itemized Deductions} = 1750 + 4700 + 8700 = 15150 \]

Step 2: Determine Applicable Deduction

We compare the total itemized deductions with the standard deduction to find the applicable deduction:

\[ \text{Applicable Deduction} = \max(\text{Itemized Deductions}, \text{Standard Deduction}) = \max(15150, 12550) = 15150 \]

Step 3: Calculate Tax Savings

The tax savings from the deductions can be calculated using the tax bracket:

\[ \text{Tax Savings} = \text{Applicable Deduction} \times \text{Tax Bracket} = 15150 \times 0.24 = 3636.0 \]

Step 4: Calculate Effective Monthly Cost of the House

To find the effective monthly cost of the house, we subtract the monthly tax savings from the monthly mortgage payment:

\[ \text{Effective House Cost} = \text{Mortgage Payment} - \left(\frac{\text{Tax Savings}}{12}\right) = 2000 - \left(\frac{3636.0}{12}\right) = 2000 - 303.0 = 1697.0 \]

Step 5: Compare with Apartment Rent

Now we compare the effective monthly cost of the house with the apartment rent:

\[ \text{Apartment Rent} = 1650 \] \[ \text{Effective House Cost} = 1697.0 \]

Since $ 1697.0 > 1650 $, the apartment is cheaper.