Question

Tax on IRA distributions

Forum|Forum|1 year ago
June 28, 2024
2 replies
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I'm trying to do some tax planning for 2024, using Turbotax 2023 to do some pro-formas. In doing so, I'm finding that a $1000 increase in my traditional IRA withdrawal increases my Federal tax burden by $270, suggesting a 27% marginal rate. #1, there was no 27% marginal rate in the 2023 tax tables (MFJ) and #2, even if there were, my retirement income isn't close to those higher marginal rates. Can someone verify what I'm looking at, and provide an explanation? Thanks

rjs

Employee

We can't really be sure what's happening, since we can't see your tax return, and there are many factors involved. Bur here are a few possibilities. The additional IRA distribution increases your AGI. That could reduce or eliminate various credits or deductions. You have to see what specific items on your tax return are changing when you add the distribution, besides the IRA distribution amount itself. The additional income could also make more of your Social Security benefits taxable. And it could be making you subject to Net Investment Income Tax (NIIT) or increasing the amount of NIIT if you are already there. So while the basic marginal rate applies to the IRA distribution itself, the added income has side effects that increase your total tax.

R

RogerButerAuthor

Except that it works in reverse as well -- Whether I add or deduct $1000 from my IRA distribution, the impact on my tax is exactly $270 up or down. Looking at the tax worksheet, it appears to me that these are being tax as both Capital Gains (15%) AND regular income (12%), which would explain the 27% impact which appears no where in the tax tables.

VolvoGirl

Employee

Where are you entering it? It goes in as a 1099R and is taxed as regular income, not as Capital Gains. Although an increase in income will change the tax on any capital gains overall. It should work the same in reverse.

Are you using the Desktop program and the What-If worksheet? You can check a box to use the 2024 tax rates. Then to see the tax calculation you need to look at the Qualified Dividends and Capital Gains Tax worksheet.

There are like 7 different ways to calculate the tax.
It depends what kind of income you have. Even though the full amount shows up in the total income on the 1040 line 7, if you have capital gains or qualified dividends the tax is not taken from the tax table but is calculated separately from Schedule D. The tax will be calculated on the Qualified Dividends and Capital Gain Tax Worksheet. It does not get filed with your return. In the online version you need to save your return as a pdf file and include all the worksheets to see it.

SteamTrain

Employee

@RogerButer

You'd need you look at the actual form 1040 lines....before & after adding the $1000 to see what' happening.

For instance, some credits might be reduced...

or, more commonly

For folks getting SS income too, during the year, the added income can make more of your SS subject to taxation...so it ends up being some tax on the $1000, and then some more of your SS income getting taxed (line 6b of the 2023 Form 1040 shows the amount that is being taxed....though, line 6b maxes out at 85% of line 6a)

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*