Why is my blended tax rate so high?

[p_alt73]

It is asking me to pay over $6K of taxes on $26K of miltiary retirement pay.  I do may more money however it is all tax-free.

[DanaB27]

To clarify, your only taxable income is your military retirement? And no other income entered? I assume by receiving tax-free money you mean the nontaxable VA benefits. What is your taxable income on line 15 of Form 1040? Please be aware, we cannot see your tax return in this public forum.

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[p_alt73]

Thank you for the reply.  No I am not including the VA pay. I live and work in a tax free zone in Europe.  They provide me a W-2 annually however as mentioned we are tax free.  Does this still get calclulated into my overall income and places me into a higher tax bracket. 

Example:

Tax Free - $80K

Taxable - $40K

[p_alt73]

Line 15 is 26,864

[DanaB27]

Please be aware, if you are a US citizen or resident then you will have to report your worldwide income. But it seems you qualify for the Foreign Earned Income Exclusion. If this is the case, your tax rate is calculated with all income and then applied to only the taxable income. Therefore, your tax rate can be higher.

"If you qualify for and claim the foreign earned income exclusion, the foreign housing exclusion, or both, must figure the tax on your remaining non-excluded income using the tax rates that would have applied had you not claimed the exclusion(s)." (IRS)

From your example, the tax rate would be calculated for 120k and then applied to the 40k.