why my refund goes down as my rental expenses go up?

[georglamb]

As I enter more rental expenses, I see my Federal Refund amount keeps going down? It makes no sense.  Is there a bug in TurboTax?  

[MinhT1]

One probable reason is that some income-based credits such as the earned income credit will decrease when you enter more rental expenses and decrease your taxable income.

Please note that the law requires you to deduct all allowable expenses and not leave out some to increse your income-based credits.

[georglamb]

Hi MinhT1,

Thanks for your quick response.  I do not have any EIC.

[KurtL1]

Another area that is affected by the amount of income on your rental property is the Qualified Business Income Deduction (QBI). The Qualified Business Income Deduction takes the qualified income and multiplies the amount by 30%. 

As your Rental Income decreases with the additional expenses, the QBI is decreased. As the QBI is decreased your taxable income and income tax amount will increase. The greater the taxes the lower the refund.

[ajt6117]

This still does not make sense to me the lower the rental income the higher the tax? It should be the lower the income the lower the tax. Expenses cut into the income. 

[BillM223]

@ajt6117

On the surface, you are correct, but as has been pointed out, there are situations in which reduced Schedule E income might actually have the opposite effect on the refund.

However, since we in the Community cannot see your tax return nor the screen you are on, I am going to encourage you to look on your 1040 and Schedules 1, 2, and 3 to see what changes when more rental expenses are added.

Even on the Online product, you can see your 1040 and its schedules at any time by clicking on Tax Tools (on the left), then Tools (below it), then clicking on View my Summary (in the center), then clicking on Preview my 1040 (back on the left). Please tell us what is changing before and after you add rental expenses.

[nocarters]

Hi BillM223,

I am having this exact problem. I notice the difference (When I add rental expenses my refund goes down) on form 8995 and it's related to the QBI as you mentioned. When I add no expenses for my rental I see:

Line 2 > 0 , line 3 (carryover from prior year) contains <0 and then 4 is the difference. 20% isthen applied and that gets moved to my 1040 line 10. 

However, when I add expenses, the lines 2 and 3 on the 8995 are 0, thus nothing is added to 1040 line 10 and I dont' get the additional deduction.

This is so counter-intuitive that I can't believe it's correct. Why would I want to claim the expenses?

Thanks!

[BillM223]

Some rentals don't qualify for QBI.

While we look at this, please review this TurboTax FAQ on the QBI deduction and see if you qualify on all points. 

I wonder if you added some other information at the same time that you added the expenses which caused TurboTax to change its mind (or it could be something else).

[whateverlola]

Same thing happens to me.  Last year too, TT "expert" seemed baffled as well. I will stay tuned to see if anyone can solve this.  I do not have any child related income credits, but I do use QBI deduction & Safe Harbor option.

[Vanessa A]

If your refund goes up when you enter expenses, you were at a point where you were getting some type of credit that was higher when you had more income.  Some credits are on a bell curve.  This means, when your income is low the credit is lower, as your income goes up, your credit increases until it hits the peak, then it will drop back down.

The best way to figure out why your refund is dropping is to keep checking the numbers on your 1040 as you make the changes.  To do this click the following after logging back into your return if you are using TurboTax Online:

• Tax Tools
• Tools
• View Tax Summary
• Preview My 1040

If you are using the desktop version you can see your 1040 in forms mode or if you have already paid for the product you can preview the pdf version. You will see the changes on line 16 or after most likely, however, you do want to compare all numbers on the 1040. 

[turb0taxer_tx_14]

Happening to me as well. Makes no sense whatsoever. We have one of the simplest tax scenario. When I add real estate tax expense of $2360, the refund goes down $282.

The higher the rent I enter, the higher the refund goes. For $10,000 increase in annual rent the refund increases by $1,200!! Hello?

[ZoltanB45]

On the left hand side of the screen, go to "Tax Tools" then "Tools," then "View Tax Summary." Delete the expenses and record the breakdown of the tax summary. Enter it in again and look at tax summary to see the difference. I would imagine the difference is the credits you received by earning more money. From there go to "deductions and credits" to see which credit was reduced. Either way, the IRS requires the taxpayer to include all expenses on their tax return.

[whateverlola]

Entering all expenses for 4 rental properties, then deleting them & going back in and re-entering them, seems like a big job. What I am hearing is then I will see why this happened by seeing credits that are accurate.

I would like to have confidence in TT & not have to check the work it does after I enter all my data.

[whateverlola]

What did you do about it?  I took a break to reflect on this.  Now back at it and finding other similar issues.  Still on 2020 return.  Really concerned it will continue on 2021.

TT was giving me an unsubstantiated QBI loss carry over from 2019.  When I tried to correct that, once again REFUND went up, when it should go way down.  Was $11000 loss they were trying to give me.

[whateverlola]

I would think my refund would/should go up as expenses increase.  It is the opposite. As I increase expenses, refund goes down, when I test it by increasing rental INCOME the refund goes up.  I get that QBI is based on net income of qualified businesses, but is only 20% of the income, not more than 100%.