Tax Bracket

[georgeturlock]

I have entered my data for Tax Year 2021 to TurboTax and wanted to verify the tax brackets I am in as I often did.

Based on my total income, my tax brackets should be 24% for ordinary income and 15% on long-term capital gain tax. However, instead I found the two marginal rates being 25.8% and 18.8%, respectively, by subtracting/adding $1,000 from/to either a short-term capital gain (or ordinary dividend or interest income) or a long-term capital gain (or qualified dividend).

Is it possible that TurboTax has some errors in the calculations?

Can someone help? Thank you!

[RaifH · Accepted solution]

You may be subject to the net investment income tax. This is an additional tax of 3.8% on capital gains if your income is over $250,000 if you're married filing jointly, $125,000 if filing separately, or $200,000 for any other filing status. 

This tax is reported on Line 12 of Schedule 2. To preview your tax return:

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
4. Scroll down until you see Schedule 2.

 

[georgeturlock]

Dear RaifH,

Thank you so much for pointing out the NIIT!

So in another word, the commonly referenced Long-term Capital Gains tax table has become obsolete now in that it should include another bracket for 18.8% for MAGI above $250k (for Married Filling Jointly, below the mark when the 20% rate kicks in).

Please let me know my understanding is incorrect.

Best regards!

[RaifH]

Not quite. It is a separate tax that is only assessed on capital gains above the threshold. It's a little hard to put into words so maybe some examples would help:

You are married with $150,000 ordinary income and $150,000 capital gains. $100,000 of your capital gains would be taxed at 15% and $50,000 would be taxed at 18.8%. 

You are married with $250,000 ordinary income and $50,000 capital gains. In this case, the entire $50,000 capital gains would be subject to both the 15% capital gains rate and the 3.8% NIIT. 

So depending on the source of your income, you may pay the NIIT on all your capital gains or only a portion of them. It does not quite fit neatly on the capital gains tax rates tables that you see everywhere, although you might find it somewhere in the small print. 

[georgeturlock]

Dear RaifH,

Thank you for the follow-up!

Your explanation is accurate and well taken.

But I still consider the existing Long-Term Capital Gain tax table misleading because it is totally depending on the MAGI at all levels --- even $10 LTCG is taxed at 3.8% if MAGI is 250k for MFJ. So one should amend the table by adding a proclamation above the numeric matrix, to the following effects (using MFJ as example):

1) If Ordinary Income included in MAGI is $250k or higher, an additional 3.8% applies to all LTCG;

2) If MAGI is greater than $250k while Ordinary Income included in MAGI is less than $250k, an additional 3.8% applies to the portion of LTGC that exceeds $250k.

By doing so, the seemingly simple LTGC tax table can survive and serve many folks whose MAGI is still less than the threshold. May be all the institutions who publish the table still need to find some incentives to amend the table and making the knowledge more transparent to taxpayers. Given that NIIT started in 2013, it is a shame that they haven't found any yet.

I sincerely thank you for answering my questions and facilitating the discussion, which I hope can benefit many.