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?
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 $7,021.) That tells me that tax is not coming from the tax tables but from one of the many worksheets that can be involved in calculating tax. To see exactly how your tax was calculated, right-click on line 44.
Shouldn't the tax prep software automatically figure out which computation method yields the lowest tax and use it? I thought TurboTax, at least, did this, but perhaps I am mistaken. I suppose I'll find out in a week when I do my taxes (estimates, for school financial aid -- can't do the final until the 1099's come out, and they're not likely to be out until the end of February).
(Directed at you and the other participants in this group:) In what scenario besides AMT could one's tax owed go up after adding deductions to one's return?
Actually one additional dollar in income might put one in higher bracket, causing another 8$ 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?
"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...
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.
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.
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.
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.
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