Why is my federal marginal rate 40%?

[chirashi]

Using TT Deluxe 2021 desktop, I have entered estimates of nearly all my expected income. As an experiment, I added another $100 of interest income, and my federal tax due increased $40.

That is a 40% marginal tax rate, whereas the highest tax bracket is 37%, and my taxable income does not put me into even that bracket. (My gross income doesn't reach the 37% bracket, either.)

Adding $200 of interest increases my tax due by $81, and adding $300 of interest increases my tax by $122 -- a 41% marginal rate.

How is this possible? Is this a bug?

Some of my prior year income accounts are still blank, waiting for my 2021 Forms 1099 -- do these incomplete entries cause TT to make spurious calculations?

[SweetieJean]

Keep in mind that any increase in income can also reduce or eliminate some deductions/credits.  But wait until you have received and entered all of your forms.  And double check your data entry, especially commas and decimal points.

[MinhT1]

The tax calculations are not this straight-forward.

In your simulations, when you increase your income, the tax will increase bot also some income-based tax credits such as the earned income credit may decrease, making the increase in taxation larger than the increase by the tax rate alone.

[Mike9241 · Accepted solution]

another possibility is you're subject to the net investment income tax.form 8960.

[chirashi]

Thanks, Mike9241

I had been told that the net investment income was applied to dividends and capital gains. Form 8960 also applies the NIT to interest income. That extra tax is the discrepancy I was seeing.

[chirashi]

The culprit is the net investment tax. I was unaware that interest income was subject to this extra tax.

[chirashi]

Answer: The culprit is the net investment tax. I was unaware that interest income was subject to this extra tax.