In TurboTax, why does entering 'exempt interest dividends' increase federal taxes owed?

[AnthonyC · Accepted solution]

While tax-exempt dividends are exempt from direct taxation, they are included in some adjusted income formulas for determining items such as the amount of taxable social security benefits, health care credits, and the alternative minimum tax.  

So, for example, by entering tax-exempt interest or dividends this could lead to having a greater amount of social security benefits taxed, which could reduce a refund or increase tax due.  Also, most of these items are not exempt from state taxation, so you would see a state refund reduced.

[krecent678]

I am Texas that doesn't have state tax but the tax-exempt amount is still added to the total tax. Why? 

[SusanY1]

Exempt-interest dividends aren't taxed based on your state of residence, but as explained above they can raise income in ways that affect other taxes and credits, and that is likely why you see a change after that entry.  

@krecent678