Why does Turbotax Business, Form 1041 Schedule D calculate Long Term Capital gains rate at 28% when the maximum Long Term capital gains rate is 20%?

[Meritarc]

The IRS instructions for Schedule D state that "Capital Gains and qualified dividends:  For tax year 2020, the 20 percent maximum capital gain rate applies to estates and trusts with income above $13, 150"  The 0 percent and 15% rates continue to apply to certain threshold amounts.  Therefore, if 100 percent of my income is from qualified dividends and capital gains, my overall tax rate should be between 0 and 20 percent.  However, Turbotax calculates my tax at 28 percent (before NIIT).  It is clearly using Trust regular income rates for the calculation where the maximum rate is 37 percent (I calculated manually to confirm).  So, how do I file when the underlying calculation within the code of the Turbotax program is clearly wrong?

[Anonymous_]

Have you looked at Schedule G on your 1041? 

Recall that the tax rate on collectibles is 28%.

[Lindagmcd]

I looked through schedule G (about 100 times b/c I did not believe that TT could have such an egregious error).  I read all of the IRS materials, including instructions for 1041 Instructions for Schedule D.  I consulted the 2020 Master Tax Guide and a professional tax CPA (all of which clearly state that Long Term Capital Gains Trust Returns are taxed at the same Capital Gains rates as individuals- with the exception of collectibles).  I did not sell collectibles.  This was a straight up long term publicly traded stock gain. 

The problem is that Turbo Tax uses the wrong tax rates (they use the Trust tax rates instead of Capital Gains rates in their calculation- so they are using 37 percent instead of 20 percent in their calculation).  To both prove that the problem is a TurboTax problem and to solve the problem, I used TaxAct, which has the correct rates programed into their returns.  My taxes were $2,500 lower as a result.  Moral of the Story- DO NOT USE TURBOTAX if you have UNDISTRIBUTED Long Term CAPITAL GAINs.  It works fine if all your capital gains are distributed and, therefore, flow directly through to the beneficiary (because the TurboTax 1040 Schedule Ds are correct- it is only the Schedule D from form 1041 that has the faulty calculations).  

[Anonymous_]

@Lindagmcd See the screenshots (from a test return) below. The total tax takes the NIIT into account.

[Lindagmcd]

First of all, line 42 of schedule D, which is what is improperly calculated, does not take into account NIIT-  that is calculated later and then added to the total tax.  Second of all, the NIIT is not 10 percent, which is the difference between what the tax on Capital Gains should be and what TurboTax calculates it to be.  On my return, the NIIT was $358 not the $2500 in excess taxes.

Doing a quick, common sense calculation in my head, I know that if 100 percent of my taxes are from ordinary dividends and long term Capital Gains, then the amount on line 42 should not be more than 12-18 percent given that the top bracket is 20 percent and it is a graduated rate.  And in fact, when I put my information into TaxAct, the rate comes out to 15% and I pay 2,500 less than if I file using TurboTax.  

The only way Turbotax can get the number it gets is if it is using the Trust Tax Rates which range from 0-38%.  

And, in fact, I did the calculations manually and came out to the exact number they came up with.  Thereby proving that Turbotax is using the WRONG rate schedule in its calculations. (See both the Master Tax Guide 2020 and the first paragraph of instructions for Schedule D "What's new" where it explicitly states that Capital Gains in Trusts are to be Taxed at Capital Gains rates- not as ordinary income).  And, if you use this program without overriding line 46, schedule D, you will be paying long terms capital gains rates of up to 38%- instead of maxing out at 20%.  In my case, we had $25,000 of capital gains tax.  TurboTax calculated a tax of $7,000 or 28%.  TaxAct calculated the rate at 15%.  Clearly, I opted to pay the 100 and file this return with TaxAct rather than pay $2500 extra to the IRS using TurboTax.

[Anonymous_]

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@Lindagmcd wrote:

In my case, we had $25,000 of capital gains tax.  TurboTax calculated a tax of $7,000 or 28%.  TaxAct calculated the rate at 15%. 

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I just conducted a quick test with $25,000 of capital gains (long-term), and the tax calculated on Schedule G is $3925 plus $454 in NIIT. 

I cannot begin to determine where there error is on the return you prepared with TurboTax.

[Lindagmcd]

You and me both.  Maybe they fixed it after I sent them my return- 5 days ago?  I don't know.  Maybe it is not seeing my Long Term Capital gains as long term capital gains- despite me putting them in as such?  It's too cumbersome to go through all the entries and figure out where things went wrong.   Maybe if I started over and input the entire return again it would work correctly, but since I already filed using TaxAct, I'll just try again next year.  Thank you for responding since TT never did get back to me. 

Your numbers are clearly correct.  Using my actual numbers my NIIT is 457, and total tax on line 45 is 3,947.  The difference between the two returns is that TT calculates my tax on line 42 as $5,285 and TaxAct has it at $4.  They both have the same Total Long Term Capital Gain in line 18c of 18,738 so not sure how they came up with such different calculations.  The only difference I can see is that on TT the 18738 is entered under Beneficiaries column and in TaxAct it is under Estate and Trust.  Not sure how that would impact it, but maybe that is a clue. 

But like I said, I sent TT a scrubbed version of my return so they should be able to tell me where I went wrong- eventually.  Again, thank you for taking the time to respond to me and for patiently trying to work through my issue.  It was extremely generous of you.