Incorrect tax rate used?

[chirashi]

In solving an earlier problem, I added $1000 in interest income to see my marginal federal tax rate.

Using the Form 1040 Qualified Dividends and Capital Gain Worksheet, line 25, I compared the tax calculation before and after the added interest income. The resulting increase in the tax was $370, or 37%, implying I am in the 37% tax bracket. [NOTE: this is before calculating the Net Investment Tax.]

However, my AGI on Form 1040-SR (Line 33) is far below the $628,301 floor for the 37% tax bracket.

Why is my tax being calculated for the higher 37% tax bracket?

[GeorgeM777]

While it appears that you are not in the 37% tax bracket, it is not clear why the additional interest of $1,000 should generate additional tax owed of $370.  Can you provide additional information regarding your other sources of income, and any tax credits you are receiving?  With additional information, we may be able to provide a more detailed explanation.  

When providing additional information, do not include any personal identifiable information.   

[Mike9241 · Accepted solution]

that additional income may be kicking some of your capital gains from the 15% bracket to the 20% bracket

see if the worksheet before is 0 on line 21 and now there is an amount.

also, many other items on your return can be affected by more income - we can't see your return.

[chirashi]

Hi, Mike9241,

My cap gains were already more than enough to get the 20% treatment.

And if some other income/deduction interaction is the culprit, I doubt that would result in exactly 37.0% marginal tax, vs the 35% I think it should be.

I get the same result when I add non-investment income (e.g., non-penalty IRA withdrawal) -- 37.0% additional tax (before other taxes/penalties). My AGI is $100K below the 37% bracket floor.

[chirashi]

Hi GeorgeM777,

I repeated my experiment, using $1000 in an IRA withdrawal (I am over 60) to avoid Net Investment Income impact. (Form 8960 is using my actual investment income for its calculations, so the extra $1000 has no impact there.)

1. My only deductions/credits are the standard deduction and the $600 charitable gift deduction.

2. My income includes employment income (I retired in 2021), Social Security, pensions, interest & dividends & cap gains, and a partial IRA -> Roth conversion.

3. I also have income tax withholding on the employment income and pensions, plus a sizable estimated tax payment.

I have concern that the additional tax calculation in TT is exactly 37.0%, when my AGI is $100K below the 37% bracket floor. If the issue were due to other tax/income/credit interactions, I do not believe the rate discrepancy would be precisely 2.0%.

[chirashi]

Added data points:

1. I eliminated my under-withholding penalty

2. Adding a $1000 IRA withdrawal increases my federal tax due by $370

3. Instead, adding a $10,000 IRA withdrawal increases my federal tax due by $3700

4. TT shows my AMT is $0.

My AGI is still far below the 37% tax bracket floor, so it looks to me as if TT is using the wrong tax calculation. I hope that is not true, but I have no other explanation at this time.

[chirashi]

Mike9241, you nailed it again.

TurboTax is calculating the tax properly. The issue lies in the Qualified Dividends and Capital Gains Tax Worksheet.

My test case adds $10,000 to the IRA withdrawal -- no Net Investment Tax impact.

The above worksheet separates investment and non-investment income, calculating the tax on each part.

- The non-investment income increase of $10,000 results in $3200 more tax on Line 22 -- a 32% marginal rate 

- The tax calculation on the investment income bumps $10,000 from the 15% cap gains rate to $20%, resulting in another 5% tax on the non-investment increase, and thus 32% + 5% = 37%. It is coincidence that 37% is also the top tax bracket.

So, I don't get a 32% bracket - my marginal rate jumps from 24% to 37%. But there may be a higher income level where the marginal rate drops back to 32% or 35%.