# Formula for calculating real cost of a deductible expense

Nice round numbers: say I perform a job that gets \$1000 gross (call this `g`) in which I incur \$100 in expense (call this `e`). The expense is fully deductible. Assume my marginal tax rate is 25% (call this `r`).

When I'm figuring how much that job nets, do I use \$75 (`e * (1-r)`) for the expense?

Is \$675 (`g * (1-r) - e`) my net earnings (after tax)?

Similarly for household deductible expenses (e.g. energy efficiency) that will save money, etc.

• Related, and see my answer there: money.stackexchange.com/questions/1018/… – Chris W. Rea Sep 15 '10 at 11:35
• @Chris W. Rea - It does look like a dupe, and your answer there is excellent. I hadn't considered the FICA side of life. – bstpierre Sep 15 '10 at 12:12
• The FICA tax reduction may be specific to the deduction being referred to in the other question. I don't think it applies generally to any deduction. – Chris W. Rea Sep 15 '10 at 15:16
• I think both this and the pretax deduction question are independent and should stay open. – Alex B Sep 16 '10 at 2:09
• @Chris W. Rea and @Alex B - If I'm self-employed and the expense comes off the top is there a difference? – bstpierre Sep 16 '10 at 12:27

For simplicity, I would subtract the expense from the gross income before accounting for taxes.

Using your example, if `g` is gross income, `r` is your tax rate, and `e` is your deductible expense:

`````` net = ( g - e ) * ( 1 - r )
= ( 1000 - 100 ) * ( 1.0 - 0.25 )
= 900 * 0.75
= \$675
``````

You got the same answer because of the distributive property of multiplication, but I believe conceptually it makes more sense to deduct the expense before accounting for taxes.

Keep in mind, when talking about other deductions, such as mortgage interest, you need to look at your overall situation and whether the taxpayer is near the standard deduction amount. For some, their interest deduction and property tax are below the standard deduction, and therefore, they'd not itemize.