Financial issues

It is important for you to understand the difference between before-tax expenses and after-tax expenses. Before-tax expenses reduce the income before taxable income is computed. After- tax expenses have no effect on tax computations. Everything else being equal, if the IRS allows you to designate a payment to be a before-tax expense, it is more favorable to you, because it reduces your tax burden. For example, if you earn $100,000 and there were only one 40% bracket, a $50,000 before-tax expense leaves you ($100, 000 − $50, 000) · (1 − 40%) = $30, 000 , Before-Tax Net Return · (1 − Tax Rate) = After-Tax Net Return while the same $50,000 expense if post-tax leaves you only with $100, 000 · (1 − 40%) − $50, 000 = $10, 000.
We have already discussed the most important tax-shelter: both corporations and individuals can and often reduce their income tax by paying interest expenses, although individuals can do so only for mortgages.
However, even the interest tax deduction has an opportunity cost, the oversight of which is  a common and costly mistake. Many home owners believe that the deductibility of mortgage interest means that they should keep a mortgage on the house under all circumstances. It is not rare to find a home owner with both a 6% per year mortgage and a savings account (or government bonds) paying 5% per year. Yes, the 6% mortgage payment is tax deductible, and effectively represents an after-tax interest cost of 4% per year for a tax payer in the 33% marginal tax bracket. But, the savings bonds pay 5% per year, which are equally taxed at 33%, leaving only an after-tax interest rate of 3.3% per year. Therefore, for each $100,000 in mortgage and savings bonds, the house owner throws away $667 in before-tax money (equivalent to $444 in after-tax money).