Rental expenses increase, refund decreases?

[prbill]

I am entering rental expenses.  As they increase, my refund is decreasing.  Does not make sense.  Anyone got an idea why.  Seems like it will be better to not report all of my expenses.

[Carl]

You are required by law to report all of your rental income, and all of your rental expenses. We don't get to chose here.

It is not at all uncommon for your tax liability to increase as you enter expenses for rental property. When your taxable income falls below a certain threshold, you lose credits such as the earned income credit as one example that I can recall off the top of my head. But don't worry about it. That number means *ABSOLUTELY* *NOTHING* to anyone, until you have completed your tax return in it's entirety.

If you're using Self-Employed or Home & Business and you're using the program the way it is designed and intended to be used, you haven't entered your "EARNED" income yet. So the absolute only thing that chaning refund or tax due number means is, "the program did something". That's all it means. Nothing more. Nothing less. Remember, the program can only work with the information you enter *at* *that* *specific* *point* *in* *time*. So until you have completed the tax return, ignore it.

[KapiL]

Hi Carl, I am not sure if your answer is completely accurate and I am wondering if there is either a bug in TurboTax and/or there is a peculiarity about the Tax law. I have entered all my information in TurboTax 2019 (downloaded version)  and entered and can still manipulate my rental expenses and see that my tax due does up as my rental properly expenses increase. This seems counter to what should happen. I am actually losing money on my rental property and my income is too high (over 150K or so) to claim the rental loss as a deduction. But, why should entering an expense increase the taxes I owe (or reduce the deduction). The only thing I can guess is that it has to do with QBI. I am wondering if the QBI benefit is on the net rental income and if expenses are added, the net rental income decreases and hence reduces your QBI deduction. PRbill did you set-up your rental property for QBI in TurboTax?  How can we get TurboTax team to review this?

[ThomasM125]

The QBI deduction is based on your net rental income, so as rental income decreased the deduction would decrease. However, I thought you said you had rental losses, so in that case your QBI deduction would be zero for the current year.

It is possible that you are subject to an alternative minimum tax which could affect things in strange ways.

What I suggest is you look at your tax return before the changes and then after to see what is being affected. That would allow for us to narrow down the possibilities. You can view your form 1040 and schedule 1 to 3 while working on your program in TurboTax as follows:

1. Find the "Tax Tools" option on your left menu bar and click on it

2. Click on "Tools"

3. Click on "View Tax Summary"

4. On your left menu bar find the "Preview my 1040" option and click on it

[KapiL]

Thanks ThomasM125, I will investigate this a bit more and get back to you. Yes, I agree with you that if I have a rental loss then my QBI deduction should be zero - and this maybe what is happening in TurboTax. But, what I believe I am seeing (which is odd) is that with positive rental income my taxes owed are less than when I am showing a rental loss. That really should not be happening. Do you agree?

[DavidS127]

When you are researching your TurboTax calculations, it may be helpful to keep in mind that the "flow" of the QBI deduction calculation depends on the source of the QBI (Schedule C, Schedule E rental, Schedule K-1, or Form 1099-DIV).  In general the flow is from the source to a QBI Component worksheet to the QBI Ded Summary to the Form 8995/8995-A.  By looking at those forms, you can usually diagnose "what happened" in your QBI deduction calculation.  There is a section on Schedule C, Schedule E, and Schedule K-1 where the QBI information calculation "starts", based on inputs.

This can be done in Forms mode of the Download/CD version of TurboTax.  In TurboTax Online you will need to "Print or Preview" a PDF of your return with the worksheets to track "what happened" with your QBI deduction calculation:

1. Select Tax Tools and then Print Center from the left menu.
2. Select the first option, Print, save, or preview this year's return and follow any additional instructions.

[KapiL]

So, definitely the issue is that I am losing the QBI deduction. As I enter rental expenses, but rental property goes into a loss and the property has no rental income and hence no QBI deduction. If I show NO (or less expenses) so that my rental property makes a profit and I have positive rental income, I get a QBI deduction. 

TurboTax is likely doing this work correctly, but a tax law that charges less tax when you make more income seems wrong or badly constructed. My case is likely common enough and it seems that if I made more money on my rental business, I would owe less taxes. 

[lisadparker]

You may also want to see if adding an expense and getting a reduction in your refund could be due to the reduction or elimination of a credit that you qualify for without the expense being added. Credits like the Earned Income Credit or Premium Tax Credit can be responsible for a dramatic decrease of your refund.

Try entering an expense that is just big enough to create the refund fluctuation, calculate the difference between it the the higher refund, then examine your return for one or more credits that add up to that 

difference.

[Joker_Six]

I'm having some of the same problem with TurboTax Home & Business. It doesn't make any accounting sense that I loss all of my refund after putting most of my wife's business expense in after her income, then when enter her business rental expense and postage expense only to have default back to the beginning balance with 2 kids. TurboTax please update your software there is definite error in your calculations. 

[SweetieJean]

As indicated above, for example, it could be due to the EIC, which is calculated on a bell curve/pyramid.  But note that you are required to claim all self-employment expenses.

eitc due diligence and self employed taxpayers | Earned Income Tax Credit (irs.gov)

[plutchko]

This is happening to me. Can I just ignore the property tax/rental credit ? I have always had this lead to a larger credit. My income has gone up but I still just rent one property and own none. I do not have business expenses. 

I am thinking of just not claiming the rental credit for NJ Taxes? 

[AmyC]

NJ Tax credit for renters will reduce your NJ income, if you qualify. This credit would not be increasing your NJ tax so there must be more going on with your return. See page 25 of Resident Income Tax Return Instructions.

@plutchko  

[Clesco]

Same issue, I followed the advice and also see that my tax refund decreases when adding expenses due to the QBI deduction going away.  This is unfortunate for this year but it does add my loss to my carry over losses.  So in 10 years when my rental mortgage is paid off, i'll have a profit and be able to apply these carry over losses then.

The urge is to just not bother claiming expenses to get the larger refund now, but I'm sure doing it correctly and using the carry over losses in the future will pay off.