The calculation of the amount of tax you don’t have to pay if you can deduct some interest is the same calculation as for the tax on taxable interest; you subtract the results from your taxable income rather than adding the results to it.
For example, suppose your taxable income is $100,000, which (same tax table as above) would result in your owing approximately $17,700 in taxes. If you have a sizeable loan such as a home mortgage, you might have paid $10,000 in interest over the course of the year. If you can list this interest as a deduction, your taxable income drops to $90,000 and your tax drops to approximately $15,200. This is a saving of $17,700 – $15,200 = $2,200 in tax.
Assuming that your loan is at 6% interest, we can approximate an effective interest rate by imagining that we ’ re repaying the tax savings to the loan, and therefore