Why does adding $4,100 in TAX EXEMT INTEREST INCOME CAUSE MY TAXES TO INCREASE BY $600 ?

[pbbrady67]

I am working on my Mother in Laws taxes. When I added $4,187 of Tax Exempt Interest Dividends, the taxes she owes incresaed by $600. How can this be correct?

[AnthonyC · Accepted solution]

While tax-exempt interest may be exempt from direct taxation, they are included in some adjusted income formulas for determining items such as the amount of taxable social security benefits, health care credits, and the alternative minimum tax.  So, for example, by entering tax-exempt interest or dividends this could lead to having a greater amount of social security benefits taxed, which could reduce a refund or increase taxes owed.  Also, most of these items are not exempt from state taxation, so you would see a state refund reduced.

See these articles and links for more information -

https://www.ssa.gov/planners/taxes.html

https://ttlc.intuit.com/replies/3299920