Long term capital gain was calculated using ordinary income tax rate in 2025 Bypass trust return

[patyan2001]

I am using Turbotax business the first time to fill 2025 bypass trust tax return. The trust only has a 1099 form from a stock account. The incomes are qualified dividend, long term capital gain, and short term capital gain. The deductions are margin interest in 2025 and margin interest carryover from 2024. After the short term gain offset by the deduction, the remaining income are long term gain and qualified dividend. However, the tax appeared to be calculated using ordinary income tax rate instead of long term capital gain rate. 

I did a simple hypothetical case: long term gain = $200K, short term gain =$200k, qualified dividend =$20k, margin interest =$100k, margin interest carryover = $100k. Turbotax 1041 form line 23 showed the taxable income as $219900 which is correct after the deduction. This taxable income should be long term gain as the margin interest should offset the short term gain, not long term gain. 1041 from line 24 total tax showed $84310. It calculated the tax as if the taxable incomes are all short term gain. 

I did a Grok (AI) search, this is what the search showed 

"Others have run into this exact issue with TurboTax Business (the desktop version) when preparing Form 1041 for trusts, including bypass/credit shelter trusts. It’s a recurring complaint in the TurboTax community forums where the software incorrectly taxes long-term capital gains (LTCG) at the regular compressed ordinary-income trust rates (which jump to 37% very quickly) instead of applying the special preferential capital gains rates via the Schedule D Tax Worksheet."

Is this problem fixable?

Thank you very much in advance for your help!

[patyan2001]

Here is the additional information:

After I entered the margin interest, the next page showed the following messages

“The investment interest deduction is limited to net investment income. Your investment interest exceeds your investment income by $200,000.

You maybe benefit by having up to $200,000 or your net capital gains or qualified dividend be counted as investment income, which will allow you to deduct that much more investment interest this year. Any such capital gain you selected will be treated as ordinary income.

If you don’t make the selection. You can carryover all your undeducted interest to next year.”

The first paragraph showed that the Turbotax failed to use the margin interest to deduct the short-term gain. In order to make the deduction happen, I selected $200,000 under box “Capital gain election amount.” Since the “capital gain” did not specifically say long or short term, I assumed that the turbotax will deduct the short-term capital gain first. If I do not do the selection, then the next page showed that $200,000 duction will be carried over to the next year.

[RobertB4444]

You have handled this properly.  The system told you that you needed to make the election and then you did and the system used the interest deduction in this year.  Well done.