increase in income vs. increase in tax bill

[Murph88]

Hello! 

My taxable income increased about 11%, but our federal tax owed increased 27%! We crept into the next tax bracket and lost the tuition deduction, but it still doesn't seem right. We went from the 22% bracket to just barely into the 24% bracket. That shouldn't cause this much of a change, should it? Could I be missing something in my return?

Thanks!

[AnnetteB6]

If you are looking at the change from 2020 to 2021, you should also consider whether the type of income you are reporting has changed in addition to simply reporting higher taxable income.

For example, if you reported qualified dividends or long-term capital gains during 2020, but a lower amount during 2021, that could have played a part in the lower taxes shown for 2020 because more of your income would have been taxed at more favorable rates.

Another consideration is whether you are reporting income subject to self-employment tax (Schedule C income).  Self-employment tax is calculated separately from income tax, but it is included in your overall taxes owed.

The best way to see what has changed and try to explain the differences would be to compare both returns line by line.  Doing this may further explain the situation you are seeing.  

[Murph88]

Thanks for replying, but we had no change in the type of income at all. Just simply an increase in wages. I just want to know if it is a likely occurrence for a tax bill to go up so disproportionally to a rise in income. 27% more taxes owed compared to an 11% rise in income. 

[AnnetteB6]

It is not necessarily a likely occurrence for your total tax to rise disproportionately due to an increase in wages.  However, you have to be sure you are looking at the change in your total tax and not necessarily the change in your balance due.

If you are basing your statements on a change in the balance due versus a change in the total tax (Form 1040 line 24), then the difference may be attributed to tax withholdings from your wages not keeping up with the increase in your wages.

You initially mentioned that you did lose the education credit that was claimed on your 2020 return.  There could be other credits that also changed or were reduced with the increase in income.  Other than the items mentioned, nothing else specific comes to mind that could affect your return the way you described.  Just be sure to compare the total tax amounts instead of the balance due amounts to see the real change in the taxes.

@Murph88

[Murph88]

My balance due is actually lower, because after a big tax bill last year I adjusted our withholdings. I expected to break even this year, but again our total taxed owed increased as I said. So we still have a significant bill, but the balance due is not the issue. I am looking at the line saying total tax due BEFORE accounting for the amount of tax we paid during the year. And that line is up 27% for some reason. Is there someone or someway TurboTax can take a look?

[RaifH]

TurboTax can do an expert review if you sign up for TurboTax Live. They will review everything line-by-line to ensure it is entered accurately. They will require you to upload all your tax documents to conduct an expert review.

Generally speaking, since it does not seem the nature of your income has changed much and you are only looking at the tax due before the tax you paid, you may want to look at the credits as @AnnetteB6 mentioned. You said you missed out on the education credit this year, which can be up to $2,500 by itself. Did you also lose the other dependent credit for a child who was going to school but has graduated? That could be another $500. Did you receive any stimulus money on your 2020 return because the IRS missed you when they distributed the payments during the year? Schedule 3 has a lot of credits and Schedule 2 has a lot of additional taxes that you may have gotten one year but not the other. 

If you have not already taken a look at this year's Form 1040, looking at that and comparing it line by line with 2020's is the best way to find the differences from one year to the next. If you have not yet paid for TurboTax, you may preview your Form 1040 and the accompanying schedules:

1. Open or continue your return.
2. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
3. With the Tax Tools menu open, you can then view your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu

[Murph88]

I bought the CD version of TurboTax and loaded it on my laptop. If I do Turbo Tax live they can just look at what I have, right? I won't have to scan and upload all of my paperwork, will I?

I have been a loyal Turbo Tax customer for 25+ years. I really just want somebody to look at my document from last year and my document from this year (in .pdf form, I guess) and tell me if I clicked something wrong or if I what is happening with my taxes is real. Or is there a private forum where I can share numbers or a .pdf with you?

The only thing I can determine that would have an impact on my balance due would be losing the $2500 education credit. But then again, before that would be applied, by tax due is 27% higher while my income is only 11% higher....

[CarissaM]

If you do live it will allow you to connect with an expert, and submit your documentation to look over. @Murph88

[Murph88]

But, Turbo Tax Live is not available if you have already purchased the CD, correct? I shouldn't have to pay twice.

Mike

[JohnB5677]

If you have your year-to-year comparison (you can get this in the Online version if you pay for TurboTax, but don't file) it will show you what areas changed.

There are three factors that will determine the size of your refund (or what you owe).

1. The total amount and type of income that you have.
2. The amount you had withheld from your wages.
3. Whether you qualify for certain tax credits.

Your income determines the amount of tax you owe.  This not only includes your wages, but also any other type of income you may have had.  A small job that issued a 1099 MISC or NEC can result in significant taxes.  Based on criteria established by the IRS there are tables that determine the amount of tax that you owe.  Double-check your income entries and make sure they are correct.

The amount you had withheld generally comes from your W-2 income; however, taxes can be withheld from other forms of income.  If the taxes withheld are more than what you owe you will get a refund.  If not, you will owe money.  Again, double-check your entries and be sure they are correct.

You can subtract Tax Credits from the amount of tax you owe.   Here are some common Credits:  

If you look at your tax return FORM 1040 you can check these entries.

• Line 19 Child Tax Credit
• Line 27 Earned Income Credit
• Line 28 Additional Tax Child Tax Credit
• Line 29 American Opportunity Credit (For College)
• Line 30 Recovery Rebate Credit
• You also may have had more taxes withheld on your income.

Compare your tax credits to what you had last year.  This is the most likely place for a large amount to be.

[VolvoGirl]

---

@Murph88 wrote:

But, Turbo Tax Live is not available if you have already purchased the CD, correct? I shouldn't have to pay twice.

Mike

---

Right live is not available for the CD Desktop program.  You would have to use the Online version to add Live expert help feature and pay for online.   Maybe you can get a refund for the Desktop program?

[VolvoGirl]

Usually more income = more tax = less refund.  Your withholding didn't increase enough to cover the tax due.  Or some credits you got are reduced because you made more income.

And the IRS changed the withholding tables so you got more in your checks during the year instead of a big refund.  Or there are other tax changes.  And any  dependents you have are a year older.  If you made more income that can reduce some credits you got like the EIC.  

Here's a good FAQ on why your refund might be less than last year

https://ttlc.intuit.com/community/refunds/help/why-did-my-refund-go-down-compared-to-last-year-s/00/...

When you enter one taxable transaction, you can't just watch the monitor.  You increased your overall adjusted gross income and with that come many other changes in your return, not just the incremental tax on the one transaction.

Like for example it increased your AGI and that would decrease some deductions if you itemized on Schedule A.  And by increasing your AGI it might reduce some credits you were getting like EIC.  And can make more of any Social Security taxable.

[Murph88]

Thanks for the help. 

How about this idea: I have a daughter in college, (20 years old) but we make too much (barely) to claim the education credit, which would have been $2500. I understand this is $2500 that would have directly reduced my tax bill, but that still doesn't explain (to me) why I owed so much more BEFORE the credit. Anyway, what if I removed her as a dependent and she did her own taxes? I would lose $500 for her on my form, but would she be able to claim the education credit? How much of that is refundable beyond zero? I read 40%, is that correct?

What ramifications would that have beyond this year?

[Vanessa A]

If you removed her as a dependent, she would be able to claim the credit, but she would NOT be able to take the refundable part of the credit since she is able to be claimed even if she is not claimed.  So, if her tax liability is already at $0, it would not help her. 

If she does have some tax liability, then she would benefit by decreasing her tax liability as far down as $0.

As far as future year ramifications, there really wouldn't be any.  For the most part taxes are filed independently of the other years.