50% Tax Rate. How Does This Happen?


R

runtwoday

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?
 
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D

dpb

runtwoday said:
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?
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...

--
 
P

Phil Marti

runtwoday said:
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?
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.
 
R

rick++

If uses tables then at the breakpoint between ranges there are step
discontinuities as the tables are computed at mid-range.
You can use one of the alternative tax computation methods
(and check that box) if you think your time is worth four saved
dollars.
 
T

Taxlover

runtwoday said:
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?
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!
 
J

Jonathan Kamens

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

Jonathan Kamens

Taxlover said:
That's nothing, I have had my tax go up by adding deductions.
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?
 
W

William Brenner

Jonathan said:
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?
If said deductions totaled less than the standard deduction?
 
H

Harlan Lunsford

Jonathan said:
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).
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
 
H

Harlan Lunsford

William said:
If said deductions totaled less than the standard deduction?
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
 
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D

dpb

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

--
 
G

Gil Faver

Harlan Lunsford said:
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.)
of course, honest mistakes happen right near that type of threshold . . .
 
J

Jonathan Kamens

Harlan Lunsford said:
1099's? You mean as in reporting your income? If so, they are suppose
to be "out" by January 31st.
Got this email from Vanguard yesterday:
**Trouble viewing this e-mail? View it as a webpage at:**
http://www.vanguard.com/web/email/080129_VBS_DelayedTaxForm_Voy2.html

----------------------------------------------
Your brokerage Forms 1099 to mail in February
----------------------------------------------
Your 2007 Vanguard Brokerage Services(R) Tax Information Statement,
which contains Forms 1099 for your brokerage account, will start to
mail and be posted on Vanguard.com on February 15, 2008--approximately
two weeks later than last year. Forms 1099 could include Forms
1099-INT, 1099-DIV, 1099-B, 1099-OID, and 1099-MISC. Read more:
[personalized URL elided]

Please note that Forms 1099-R and 1099-Q will start to mail
and be available online on January 29, similar to last year.

View the 2007 tax mailing schedule. Go to:
[personalized URL elided]

The later mailing of your Tax Information Statement is consistent
with brokerage industry trends and is an attempt to minimize the
number of revised tax forms that get sent out because of income
reclassifications or data corrections by security issuers. Please
note that, despite the later mailing, you may still receive revised
brokerage Forms 1099.
 
S

Seth

Yes, because of AMT.
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
 
H

Harlan Lunsford

Jonathan said:
Harlan Lunsford said:
1099's? You mean as in reporting your income? If so, they are suppose
to be "out" by January 31st.
Got this email from Vanguard yesterday:
**Trouble viewing this e-mail? View it as a webpage at:**
http://www.vanguard.com/web/email/080129_VBS_DelayedTaxForm_Voy2.html

----------------------------------------------
Your brokerage Forms 1099 to mail in February
----------------------------------------------
Your 2007 Vanguard Brokerage Services(R) Tax Information Statement,
which contains Forms 1099 for your brokerage account, will start to
mail and be posted on Vanguard.com on February 15, 2008--approximately
two weeks later than last year. Forms 1099 could include Forms
1099-INT, 1099-DIV, 1099-B, 1099-OID, and 1099-MISC. Read more:
[personalized URL elided]

Please note that Forms 1099-R and 1099-Q will start to mail
and be available online on January 29, similar to last year.

View the 2007 tax mailing schedule. Go to:
[personalized URL elided]

The later mailing of your Tax Information Statement is consistent
with brokerage industry trends and is an attempt to minimize the
number of revised tax forms that get sent out because of income
reclassifications or data corrections by security issuers. Please
note that, despite the later mailing, you may still receive revised
brokerage Forms 1099.
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
 
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M

Mark Bole

Seth wrote:
[...]
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.
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
 
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T

Taxlover

Mark Bole said:
Seth wrote:
[...]
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.
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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