Tax on IRA distributions

[RogerButer]

I'm trying to do some tax planning for 2024, using Turbotax 2023 to do some pro-formas.  In doing so, I'm finding that a $1000 increase in my traditional IRA withdrawal increases my Federal tax burden by $270, suggesting a 27% marginal rate.  #1, there was no 27% marginal rate in the 2023 tax tables (MFJ) and #2, even if there were, my retirement income isn't close to those higher marginal rates.  Can someone verify what I'm looking at, and provide an explanation?  Thanks

[rjs]

We can't really be sure what's happening, since we can't see your tax return, and there are many factors involved. Bur here are a few possibilities. The additional IRA distribution increases your AGI. That could reduce or eliminate various credits or deductions. You have to see what specific items on your tax return are changing when you add the distribution, besides the IRA distribution amount itself. The additional income could also make more of your Social Security benefits taxable. And it could be making you subject to Net Investment Income Tax (NIIT) or increasing the amount of NIIT if you are already there. So while the basic marginal rate applies to the IRA distribution itself, the added income has side effects that increase your total tax.

[SteamTrain]

@RogerButer 

You'd need you look at the actual form 1040 lines....before & after adding the $1000 to see what' happening.

For instance, some credits might be reduced...

or, more commonly

For folks getting SS income too, during the year, the added income can make more of your SS subject to taxation...so it ends up being some tax on the $1000, and then some more of your SS income getting taxed (line 6b of the 2023 Form 1040 shows the amount that is being taxed....though, line 6b maxes out at 85% of line 6a)

[RogerButer]

Except that it works in reverse as well  -- Whether I add or deduct $1000 from my IRA distribution, the impact on my tax is exactly $270 up or down.  Looking at the tax worksheet, it appears to me that these are being tax as both Capital Gains (15%) AND regular income (12%), which would explain the 27% impact which appears no where in the tax tables.

[VolvoGirl]

Where are you entering it?   It goes in as a 1099R and is taxed as regular income, not as Capital Gains. Although an increase in income will change the tax on any capital gains overall.  It should work the same in reverse.  

Are you using the Desktop program and the What-If worksheet?  You can check a box to use the 2024 tax rates.  Then to see the tax calculation you need to look at the Qualified Dividends and Capital Gains Tax worksheet.

There are like 7 different ways to calculate the tax.
It depends what kind of income you have. Even though the full amount shows up in the total income on the 1040 line 7, if you have capital gains or qualified dividends the tax is not taken from the tax table but is calculated separately from Schedule D. The tax will be calculated on the Qualified Dividends and Capital Gain Tax Worksheet. It does not get filed with your return. In the online version you need to save your return as a pdf file and include all the worksheets to see it.

[rjs]

@RogerButer 

The calculation of the tax on long-term capital gain is complicated. The rate that applies to your long-term capital gain is determined by your total taxable income. The long-term capital gain is "stacked" on top of your taxable ordinary income when calculating the tax on the gain. What might be happening is that your long-term capital gain straddles the 0% and 15% brackets. If you add $1,000 of ordinary income, such as an IRA distribution, it pushes $1,000 of long-term capital gain from the 0% bracket into the 15% bracket. So you are only paying 12% on the IRA distribution, but you have to pay 15% on an additional $1,000 of long-term capital gain. In the reverse situation, if you reduce your IRA distributions by $1,000, then $1,000 of long-term capital gain drops down from the 15% bracket into the 0% bracket, so you see a $270 reduction in total tax.

If you have qualified dividends (1099-DIV box 1b), the qualified dividends are combined with long-term capital gain when calculating the tax.

[fanfare]

If you file Schedule D, the Tax Tables are not used.

An IRA distribution is always ordinary income.

@RogerButer 

[rjs]

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@fanfare wrote:

If you file Schedule D, the Tax Tables are not used.

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That is not true in all cases. There are cases where you file Schedule D and use the Tax Table either directly or indirectly.

If you file Schedule D, in most cases you will have to use either the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet to calculate your tax. But both of those worksheets use the Tax Table for certain levels of income. So in those cases you cannot take your tax directly from the Tax Table, but you are still using the Tax Table as part of the calculation on the worksheet.

There are some cases where you file Schedule D but do not use the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet. In those cases, if your taxable income is less than $100,000, you do take your tax directly from the Tax Table even though you are filing Schedule D.