In most cases, the interest paid on mortgage loans is deductible from your federal income taxes. You may therefore want to make financing decisions on an after-tax basis, particularly when you are comparing a tax deductible mortgage loan to a consumer loan. To do so, you need to know your marginal tax rate. This is the amount of each additional dollar of income that is taxed away. It is also the amount of each dollar of tax-deductible expenses that reduces your taxes. So, if you know your marginal tax rate, you can easily determine how much tax you will save.

We can illustrate the use of the marginal tax rate with an example. Suppose a single taxpayer currently rents and is considering buying a home. Her adjusted gross income is $30,000, and she has no itemized deductions. If she buys the home, tax-deductible interest and property taxes would amount to $6,750 the first year. By itemizing, she gives up her standard deduction of $4,400 (based on 2001 tax law), so the amount of additional tax deductions would be $2,350. Her marginal tax rate is 15%. Buying the home would save her $352 (.15 times $2,350) in taxes the first year.

To see that this is correct, we can calculate her taxes with and without the additional deductions. As a renter, her taxable income would be $22,700. This is her adjusted gross income of $30,000 less a $2,750 personal exemption and $4,400 standard deduction; taxes would be $3,405. With the additional deductions, her taxable income is $20,350 and taxes are $3,503. The difference is $352.

In 2002, there are currently six marginal federal tax rates: 10%, 15%, 27%, 30%, 35%, and 38.6%. You can find the rate for any income range by referring to the Tax Rate Schedules included in the Form 1040 book mailed to most taxpayers in January