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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1080
Experience:  US Taxation specialist.
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Our question concerns paying down on a line of credit (2.45%

Customer Question

Our question concerns paying down on a line of credit (2.45% interest rate with $46K remaining), home mortgage (5.5% with $82K remaining) or investing $40K we just received.
Submitted: 2 years ago.
Category: Tax
Expert:  USTaxAdvising replied 2 years ago.

USTaxAdvising :

I am not a financial advisor but I can give you some facts about your loans and tax benefits if you would like.

USTaxAdvising :

Your mortgage will give you a tax deduction of approximately $4,510 so most people will not pay that balance off as it provides a lower tax liability.

USTaxAdvising :

If you were eligible for a tax deferred retirement contribution such as a 401K or IRA then it would be most advisable to contribute as much as you can to that. Thus deferring income taxes on your current earnings.

Customer :

The deduction for the mortgage helps. What would you suggest we do with the $40K (besides sending to you)? Pay down a lower interest 'line of credit' to free up cash should we need it?

USTaxAdvising :

If you were not going to invest in a tax deferred account then you would have to wiegh the cost benefit of the annual rate of return you expect on the 40K and the additional tax consequences of the income.

USTaxAdvising :

Are you considering a tax deferred investment or regular investment?

Customer :

Should tell you that we max out the contribution to the 401K. Concerning tax deferred or regular, would like recommendation.

USTaxAdvising :

Okay if you are already maxing out a tax deferred then that benefit is off the table.

Customer :

gotcha.

USTaxAdvising :

If you can earn a greater than 2.45% return on the 40K then you are earning a "postive spread" meaning that you are making more on the 40K than what you owe on the 46K. (This is how Mr. Trump made his millions)

USTaxAdvising :

Is the credit line rate fixed?

USTaxAdvising :

or is it variable?

Customer :

Credit line is variable, currently at 2.45%.

USTaxAdvising :

If you expect interest rates to go down or remain the same then perhaps it might be best to invest the 40K. You can probably average 10% return.

USTaxAdvising :

I personally don't like debt so I might pay half off and invest the other half.

Customer :

thanks for the perspective.

USTaxAdvising :

Overall you are getting a better tax benefit on the mortgage so that would be the last loan to be paid down.

USTaxAdvising :

Let me know if you have any further questions.

Customer :

thanks...

USTaxAdvising :

Let me know if you have any further questions, I am here to help.

Expert:  USTaxAdvising replied 2 years ago.
I should also mention that if the Line of Credit is a Home Equity Line of Credit it too would provide for an income tax deduction.

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