50% Tax Rate. How Does This Happen?

Using my tax prep software I added $16 in bank interest to my return. Taxable income (1040 line 43) increased from $52,026 to $52,042 as expected. However Tax (1040 line 46) increased from $5,810 to %5,818.

So that $16 interest caused my tax to increase by $8. I paid 50% tax on that $16. How does this happen?

Reply to
runtwoday
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If uses tables then at the breakpoint between ranges there are step discontinuities as the tables are computed at mid-range.

But, your data doesn't seem self-consistent -- I just looked at the irs

2007 1040 tables at irs.gov and the number 5,810 doesn't appear -- 5,811 and 5,810 do, but for $42K in income...

That was real quick so I may have inadvertently misread, but the apparent marginal 50% bracket is owing to the tables...

Reply to
dpb

Short answer:

The structure of the Tax Tables

Long answer:

It happened because you made the mistake of looking at only one entry on a tax return that compiles everything on it in determining your tax. It's a meaningless exercise. To see what I'm talking about, start a new return and input that interest income as the first income item. Using your logic, you'll see that you don't pay a penny of tax on that income.

As for why your tax would increase by $8 because of a $16 increase in taxable income, it's because of the tax tables. If you go low-tech and look at the Tax Tables in the 1040 instructions you'll see that in your income area, the Married, Filing Jointly tax increases by either $7 or $8 for each move to the next $50 range. That's because you're in the 15% bracket, so every $100 of additional income increases your tax by $15.

If you look at the Tax Tables you'll find that your taxable income doesn't yield the tax that your software is calculating. (For taxable income of $52,042 the tax table shows a tax of $7,021.) That tells me that tax is not coming from the tax tables but from one of the many worksheets that can be involved in calculating tax. To see exactly how your tax was calculated, right-click on line 44.

Reply to
Phil Marti

You can use one of the alternative tax computation methods (and check that box) if you think your time is worth four saved dollars.

Reply to
rick++

That's nothing, I have had my tax go up by adding deductions. I have to play with them to find which are good and which are bad!

Reply to
Taxlover

Shouldn't the tax prep software automatically figure out which computation method yields the lowest tax and use it? I thought TurboTax, at least, did this, but perhaps I am mistaken. I suppose I'll find out in a week when I do my taxes (estimates, for school financial aid -- can't do the final until the 1099's come out, and they're not likely to be out until the end of February).

Reply to
Jonathan Kamens

Presumably this was because AMT kicked in?

(Directed at you and the other participants in this group:) In what scenario besides AMT could one's tax owed go up after adding deductions to one's return?

Reply to
Jonathan Kamens

If said deductions totaled less than the standard deduction?

Reply to
William Brenner

Yes, because of AMT.

Reply to
Taxlover

1099's? You mean as in reporting your income? If so, they are suppose to be "out" by January 31st.

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Actually one additional dollar in income might put one in higher bracket, causing another 8$ in tax.

Just yesterday I called the city to confirm their gross receipts tax table. Seems that if business gross receipts are less than 100,000$, then the tax is $100. If more, the tax is 267$ plus $2.05 per thousand over the 100,000. So, see what an extra dollar might do?

Who said "taxes is fair!"???? (Surely not I.)

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Harlan Lunsford wrote: ...

"Supposed to" and "are" aren't necessarily consonant... :)

I've several annually that are lucky to arrive by the ides of April, what more 1Feb...fortunately, they're similar enough from year to year and not grossly-distorting of results, but all the same...

Reply to
dpb

of course, honest mistakes happen right near that type of threshold . . .

Reply to
Gil Faver

Got this email from Vanguard yesterday:

Reply to
Jonathan Kamens

I don't see how. AMT computes an alternative tax, and you pay the higher. (The AMT line is the excess of AMT over regular tax.) If the deduction is ignored by AMT, the AMT stays the same, and the regular tax drops. If the deduction is valid for AMT, they both drop.

Seth

Reply to
Seth

Ah yes; I was thinking in terms of 1099misc form principally but of course remember last year , maybe year before too, when Vanguard and some other mutuals got special dispensation for the extra time.

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Seth wrote: [...]

I think he's referring to the increase in the AMT *excess* over regular taxable income, which is the only number many people notice on their return when they think "AMT".

The AMT excess goes up to make up the difference due to the lower regular tax.

-Mark Bole

Reply to
Mark Bole

No, the year before last I had to actually remove some deductions because they resulted in higher tax. I posted here with specifics asking if it was real or TaxCut was crazy. The replies were that it was real. I don't remember the details.

Reply to
Taxlover

Perhaps this thread?

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Reply to
Jonathan Kamens

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