This is not just a problem with Turbotax, the flawed logic is in the IRS worksheet included in the 1040 instructions. I am attaching a hypothetical example of a completed worksheet. As noted in my question, the flaw occurs on line 18 where you subtract line 17 (effectively taxable income that is not qualified dividends or capital gains ) from the 15% bracket threshold (in the example, $479,000 for married/filing jointly). Following this example, there is a simple way to calculate the tax: With $700,000 in both qualified dividends and capital gains, the tax should be: (a) 15% of $479,000, or $71,850 plus (b) 20% of the difference between $700,000 and $479,000, or $44,200 plus (c) the tax on $200,000 taxable income that is neither qualified dividends nor capital gains or $36,579. The total tax should be $152,629 but the worksheet yields a result of $162,629. The $10,000 difference is directly the result of the $200,000 that was subtracted in line 18 being taxed at 20% versus 15%. While this is a hypothetical example, I have a real example on a return I am preparing with a similar result.
