Projected Tax Due INCREASED after adding asset/depreciation for a Rental Property

[darrylyau]

I am new to reporting on rental property. I just added an entry in the Asset/Depreciation for my rental property. I added in the cost of the property, and found the cost of land in one of the city's valuation forms. After submitting this information, the projected federal tax that I was due increased significantly. 

Did I do something wrong? I thought adding property in the asset/depreciation form is meant to REDUCE the taxes I am owed, not the opposite.

[VolvoGirl]

Could be several reasons.  A couple.... by increasing your deductions it will decease your income and you may not be getting as many credits as before.   Also after you reduce your income to zero there is no more refund to get back but you still may owe for other things like self employment tax or the 10% early withdrawal penalty from 401k or IRA accounts.

[darrylyau]

i dont think self employment tax, or withdrawal penalties would apply for me...

Are there other common reasons why this may happen? 

That screen seemed fairly straightforward, but i wonder if I may have entered anything wrong. Are there any numbers in that screen that should be represented as a negative number instead? 

[hladejoe]

I had exactly the same thing happen.  My projected taxes were $823.  I added a new stove for $962 taking the full depreciation the first year.  My projected taxes increased to $847.  There is definitely a glitch.

[SusanY1]

While it seems counter-intuitive, there are a number of things that can happen to cause this that are correct.  Sometimes the entire situation will correct itself when the balance of the data is entered.  This can happen if a reduction in income reduces credits that are income-based (such as child tax credits or earned income credits) or if the additional deduction causes the taxpayer to be subject to AMT.  

It's hard to know without information on other aspects of your tax situation, but this is not an unheard of phenomenon.  The best way to get figure out what's causing this is to preview your 1040 form before and after the entry.  

If you are using a desktop version of TurboTax simply click on the Forms icon in the upper right of the screen (upper left for Mac).  If you are using the online version follow these steps:

 

1. Click on Tools in the left navigation panel
2. Then click Tax Tools
3. Click on View Tax Summary in the pop-up box
4. Click on Preview my 1040 in the left menu panel

[darrylyau]

Thanks @SusanY1 for the suggestion. 

I compared the two 1040 summaries. I noticed that when I entered the asset for depreciation, my "

Qualified business income deduction" went all the way down to 0. This led to the increase in the net tax balance that was due. 

The only difference between the two scenario is entering my rental property as an asset for depreciation. The amount changed immediately after entering the asset... any idea whether I may have done something wrong? 

[LeticiaF1]

The Qualified Business Income deduction (QBI) is a deduction that lets you claim up to 20% of your qualified business income from federal income tax.   What is happening is that when you enter the depreciation, the QBI will go down if your rental income goes down, and this could make your taxes go up.  

Even if you loose the QBI deduction, you should enter all the assets that you have in your rental property under depreciation.  Depreciation is the process that you will use to deduct the cost of your property.    Even if you do not take it, you will have to reduce your basis when you sell the property.  This means that if you have rented the property for a few years and you decide to sell it, even if you did not depreciate it, you will have to reduce your cost basis by the depreciation you did not take.  For more information about depreciation see the TurboTax help article below:

How do I handle capital improvements and depreciation for my rental?

To go back through your rental property entries and review your depreciation:

1. Open or continue your return, if you haven’t already.
2. Locate the Search bar in the upper right of your screen
3. Search for rentals and select the Jump to link at the top of the search results.
4. Answer Yes to the question Did you have any income from rentals or royalties?
5. On the screen What are you here to report?, select Rental property and Continue

@darrylyau