Simple estimation of the deductible interest

Let’s explain the concept with a reasonably accurate example.

1.

You have a 30 year fixed loan at 4% interest.

2.

Initial principal of $1.6M = $1,600K

3.

Monthly payment of $7,638.64

4.

The loan started many years ago in May 2015

5.

For 2022, the principal went from $1,390K to $1,352K via the non-linear amortization curve.

What exactly is deductible interest? You can answer this in 2 seconds: $40K.

Here’s how it works: If your loan predates 2017, you can deduct interest on up to $1M of the principal. Assuming your principal exceeds $1M throughout the year, your deduction is capped at $1M. With an interest rate of 4%, that equates to $40K of interest deductible. This calculation is straightforward and doesn’t factor in proration or amortization schedules. While some opt to calculate deductible interest using formulas that approximate based on an amortization rate, the result is typically around $40K. Any discrepancy usually stems from the formulas’ approximations or rounding off.