Huh?

You've taken a simple topic and made it complicated. If you pay more, you pay more, and if you can get the same for less, you pay less. One's tax rate has nothing to do with it.

(edited for clarity)

This post was edited by snidely on Fri, Nov 28, 14 at 18:11

We cut up our cards years ago. Not easy, but well worth it. We took a Financial Peace class at church. So many ways you can waste money if you don't know what you are doing. We had to pay to take the class, but it was worth every penny.

IF the items that you buy using that card, whatever you call it, are deductible, the rate of income tax isn't involved.

And it doesn't appear to be, on the surface or in the short term anyway ... but if the stuff that you buy isn't deductible, you have to pay off both the loan and the interest with after-tax money.

When you buy your car, or gas for it, if you can deduct part of the amount at income tax time, you are paying that part with before-tax money ... but if you can't, you're paying for it with after-tax money.

When we pay house rent, fuel, power, clothing, food, coffee en route to work, gifts for the kids ... and most of the other stuff that we buy, unless we can deduct all or part of the cost at income tax time, we are paying for those things with after-tax money.

When you make a loan, including one using the "credit"/"debt" card, if you can't deduct the interest, or principal, payments, you have to make those payments using money that you paid tax on, earlier.

So your real cost includes the extra work that you had to do in order not only to pay that high rate of interest on the loan, but an extra amount needed to pay the income tax on your earned income before you were free to take it home and use it to pay your usual expenses ... including the interest on that loan.

ole joyful

What you're saying seems unnecessarily complicated. Your numbers are off too - the finance charge to carry the $90 balance for one month would be less than $2, not $20 or more.

Try this instead - "credit card borrowing is expensive, avoid it when you can."

I don't find your made-up cases useful. Or typical of what most people face. Loan repayments are ALWAYS with after-tax money. Your spending list has items that are almost never deductible for individuals. No one does extra work to pay tax - they do extra work to have more after tax.

Individuals spend mostly after tax money, period. No need for long drawn out scenarios.

Here's my suggestion for you and everyone to increase personal wealth. Pay no more than your legal obligation for income tax each year, but try to increase your tax bill by at least 10 percent year on year, every year. Keep that up for awhile and you'll retire with more savings and at an earlier age than you ever imagined could be possible.

Depending on your state if you increase your fed tax bill you also increase your state tax bill. Some states will penalize you if you have large refunds each year.

Old Joyful I do not know about the Canadian tax system but if you increase your debt in order to have deductions you are not really saving anything. Just using the government to hold your money to later. I will admit when I was young and actually used more than the standard deductions I paid extra so I could have a bigger refund. My savings habits took a while to be established.

You misunderstood me, maifleur, it was a cheeky comment. Translation - pay attention to your income and don't let tax issues direct your actions. The tax rate is always less than 100%. If your tax bill increases every year, that means your income has too, and you'll have more in your pocket by focusing on what matters.

"So ... best to work hard to pay off those "credit"/"debt" card balances in full, in order to avoid paying those rates of interest! "

Great post!

here is a novel idea. If you don't have cash, don't buy it (with very few exceptions). I am a boomer and if I remember correctly that was my parents mantra. I remember going on vacation with travelers checks and cash.

Learning how money works is an interesting hobby ... and it pays well.

Learning how taxes work is an interesting hobby ... and can be profitable, as well.

As a financial advisor, for most of those years selling no financial products, I learned a lot from my clients and passed on a number of useful ideas, as well. And, being frugal myself, didn't overcharge for my services.

One person, earning about 50K a year, paid next to no income tax.

S/he had a number of Canadian stocks, dividends on which are taxed at a low rate.

S/he gave around 20% or sometimes more of income to churches and various charities and to support of a political party. The political deductions died with the year ... but charitable contribution credits could be carried over into another year (5 year max) and s/he almost always had enough credits to bring her/his tax load down to near zero.

You may have seen my story over on "Money saving tips" or "Household finance" of how to get a dollar's worth of charitable value for about 50 - 60 cents (applicable mainly in Canada) and that assumes gifts originating from one's bank account ... which contains after-tax money.

But ... when a Canadian "taxpayer" transfers stock or mutual funds which have increased in value to a charity ... there is no income tax levied against the capital gain.

As for my situation this year, a couple of weeks ago I transferred some stock that I'd bought 47 years ago for $4.20 or so to a local charity for somewhere around $95.00 - 99.00 (haven't heard if it's been certified and sold). If it's $94.20, there'll be $90.00 of capital gain and in the ordinary course I'd have to pay tax at regular marginal (i.e. highest) rate on half of the capital gain, or $45.00.

Avoiding tax on $45.00 suits me fine ... if I plan to make substantial gifts to charity, anyway.

Should have made the transfer a couple of weeks before I did ... before the market drop: oh, well ... one wins a few ... and loses a few, in this life.

ole joyfuelled ... with a dollar or so, here and there, to help - preferably pre-tax ones