When adding rental mortgage interest, my federal tax due increases. This seems to be an error, is anyone else having this problem?

[HelenC12]

Adding expenses lowers your Adjusted Gross Income (AGI).  There may be credits or deductions on your return that decrease as your AGI goes down. 

•  For example, the Earned Income Credit (EIC) or the Qualified Business Income (QBI) deduction.

People often don't realize that every entry causes an entire recalculation of your tax return and can often cause unexpected results. 

Source:Anita01

[rall]

I am facing the same situation. i.e adding rental expenses (taxes, property manager fees, repairs...)  INCREASE my FEDERAL TAXES.

Even if this is true, is it legal not to report expenses? I can still report all the rental income, but what if I do not report all the related rental expenses. (if that saves me federal taxes).

Thanks

[tripp6]

I'm glad someone else is having this issue. I find the previous response from the "tax expert" unsatisfactory. Even if she is correct, the explanation is poor. Why does reducing AGI increase tax liability?

I believe tax law does require you to report all of your eligible expenses. But I am not an expert, you should do your own research to be sure.

I think this will be my last year with TurboTax.

[rall]

This does not make any sense at all.  Since we have time, I will start working with HR Block.

A friend that works in HR Block for last 15 years said that she never came across a situation where increases in expenses INCREASED taxes.

So will wait for TurboTax experts to come with a credible answer otherwise, I too will stop using TurboTax .

[Carl]

That number changing at the top of the program *MEANS* *NOTHING* until you have completed your tax return in it's entirety. During the process of entering data, that number will be "ALL" "OVER" "THE" "PLACE". I guarantee it. When the number changes, it means one thing, and one thing only. "THE PROGRAM DID SOMETHING". That's it. Nothing more. Nothing less. Remember, the program can only work with the information that *YOU* have provided it at "THIS SPECIFIC AND EXPLICIT POINT IN TIME". So until you finish your tax return in it's entirety, that number is ABSOLUTELY MEANINGLESS to ANYONE for ANY REASON.

[tripp6]

Yes but can you explain this scenario to me... I have input all of my information in every field throughout the entire program. All income, expense, deductions. I'm ready to push submit, and the program shows no federal tax due. Then I remember I didn't enter the real estate tax expense related to a rental property. I go back, add a  $5,000 expense. The result is that my federal tax liability increases. No one has been able to adequately explain to me how adding a rental related expense can increase my tax liability with all other information staying constant. 

[CatinaT1]

One probable reason is that some income-based credits such as the earned income credit will decrease when you enter more rental expenses and decrease your taxable income.

Please note that the law requires you to deduct all allowable expenses and not leave out some to increase your income-based credits.

Another area that is affected by the amount of income on your rental property is the Qualified Business Income Deduction (QBI). The Qualified Business Income Deduction takes the qualified income and multiplies the amount by 30%. 

As your Rental Income decreases with the additional expenses, the QBI is decreased. As the QBI is decreased your taxable income and income tax amount will increase. The greater the taxes the lower the refund.

On the surface, you are correct, but as has been pointed out, there are situations in which reduced Schedule E income might actually have the opposite effect on the refund.

However, since we in the Community cannot see your tax return nor the screen you are on, I am going to encourage you to look on your 1040 and Schedules 1, 2, and 3 to see what changes when more rental expenses are added.

Even on the Online product, you can see your 1040 and its schedules at any time by clicking on Tax Tools (on the left), then Tools (below it), then clicking on View my Summary (in the center), then clicking on Preview my 1040 (back on the left). Please tell us what is changing before and after you add rental expenses.

[Critter-3]

The "Refund-O-Meter" is a real PITA and should be removed or at least not activated until the end since it causes many people to  fret ... as said before the only time that number is correct is when the return is completely finished.  As your AGI changes so does certain credits  and it may even put you into an AMT situation in some cases.   You must enter in all your income and deductions on the Sch E ... leaving some off is not an option.   Review the return before and after you make changes to see how something on line 1 can effect the entire return ... it is a ripple effect like a rock thrown into a pond.  

[wkmurthy]

I am facing same issue and If I take out all Rental home expenses, my tax due is reducing?

Will it be OK to remove all the expenses for this year? Will it create any issues?

[RaifH]

As others have said in this thread, all expenses associated with your rental must be reported to prepare a complete and accurate tax return. Even if it is causing more tax due this year because of how different credits may be interacting with the new entries, you may be depriving yourself of future carryover credits if your entire expenses are not deductible this year which could have a much greater effect in future years than whatever your tax is increasing by this year. And that's a big if, as others have said, until your tax return is complete, take the refund meter with a giant grain of salt. 

It is not okay to remove your expenses. You would be doing yourself a huge disservice, as anyone who has neglected to take depreciation over the years finds out when they sell their rental home. 

@wkmurthy

[wkmurthy]

Thanks much for the inputs.

While reading the community groups, got to know that I can not consider rental property income as QBI. Last year I did it as QBI and there is some carry over of losses from same property. Do you recommend to take out those carry forward for this year? 

[AmyC]

If the rental is passive then it does not qualify for QBI. You should take out QBI loss carryover but not passive loss carryover.

@wkmurthy