Thinking about this some more, I realized that you should not be focusing on the tax brackets and the Tax Computation Worksheet at all. Knowing your tax bracket will not tell you what you really want to know. You are trying to determine how much tax you will owe for 2024, and the tax brackets can't tell you that. That's because additional income often has side effects beyond the basic tax on the additional income. The result of the side effects means that the amount of tax that you owe can increase by more than your bracket percentage, so knowing the bracket for a particular type of income will not tell you how much that income will add to your tax.
Here are a few examples of side effects of additional income.
1. As mentioned earlier, additional ordinary income can push some of your qualified dividends and long-term capital gain into a higher bracket. The tax bracket for ordinary income doesn't change, but you pay more tax on the qualified dividends and long-term capital gain.
2. If you have Social Security income, additional income of any kind can increase the amount of your Social Security that is taxable. So your total tax increases by more than the bracket percentage applied to the added income.
3. Many deductions and credits are limited based on Adjusted Gross Income (AGI). Additional income increases your AGI. The higher AGI can reduce or eliminate deductions or credits. The bracket percentage is applied to the added income, but your tax increases by more than the bracket percentage because a deduction or credit was reduced.
The only way to take the possible side effects into account is to use your pro forma 2024 tax return to estimate your tax. Forget about tax brackets, the Tax Computation Worksheet, and the Qualified Dividends and Capital Gain Tax Worksheet. If you want to understand why your tax increases by a certain amount when you add income, you have to compare the Form 1040 line by line before and after to see what changed, then drill down to schedules and worksheets to see the details. The tax brackets are not at all the whole story.
