Entering tax exempt bond fund dividends reduces return

Forum|Forum|2 years ago
March 10, 2024
2 replies
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When I enter tax exempt bond fund dividends into TurboTax, reported on Line 12 of 1099-DIV, my return decreases significantly. Tax exempt dividends would NOT be expected to affect my total tax but apparently does. A previous thread on this forum from last year (2022) had the same concern, but I don't see any resolution to this question. Can anyone explain?

TurboTax Basic Windows

Best answer by SteamTrain

@wbellows

For those who are getting Social Security, the tax-exempt $$ can make more of your SS income taxable...up until 85% of SS is getting taxed, then it stops.

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Occasionally, I seem to recall that added Tax-exempt $$ can affect other special credits too...don't recall which right now though.

IF you aren't getting $$ from SS yet, then the best way to see what is happening is remove the tax-exempt $$ in box 12 on that 1099-DIV, then to print out your form 1040. Then put the tax-exempt $$ back in and print out the form 1040 again. Then look at the forms line-by-line to see if you can see what income or credit $$ changed (other than line 2a of the form1040)

SteamTrainAnswer

Employee

@wbellows

For those who are getting Social Security, the tax-exempt $$ can make more of your SS income taxable...up until 85% of SS is getting taxed, then it stops.

_________________________

Occasionally, I seem to recall that added Tax-exempt $$ can affect other special credits too...don't recall which right now though.

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

wbellowsAuthor

Yes, I am filing for the first time after going on Social Security. I am incredulous to learn that the tax-exempt dividends from my municipal bond fund have now become a liability, making a higher percentage of my social security income taxable! I guess they are still technically tax exempt, they just cause more of my social security income to be taxed, which in effect is the same thing as taxing them! I always have to learn things the hard way!

Andrew_Garland

Enter the sum of all dividends, both taxable and exempt in the first box.

It then makes sense that the exempt dividends entered separately subtract from the taxable total.

wbellowsAuthor

Andrew,

Not sure what form or worksheet you refer to when you say "in the first box."

I found Worksheet 1 in IRS Publication 915 and used it to manually determine the taxable portion of my benefits. It includes tax-exempt interest from line 2a of Form 1040-SR as a component of my taxable benefits. Nowhere is it subtracted. Prior to me collecting social security, it was never a factor in calculating my taxable income. TurboTax calculated my return correctly, I was just mistaken to assume that income and benefits were treated the same!

DMarkM1

Yes, the exempt interest is used to figure how much if any of your social security benefits are taxable. A way to see what is happening is to "Preview form 1040" with the exempt interest in your return and then with the exempt interest not included (see steps below). Look at line 6, a and b, to see the social security benefit changes (taxable 6b).

1. Select "Tax Tools" in the left hand menu
2. Select "Tools"
3. Select "View Tax Summary"
4. Select "Preview My 1040" in the left hand menu

Worksheet 1 in Publication 915 is used to figure the taxable portion of your social security benefits. TurboTax makes these calculations for you based on your entries in "Wages & Income".

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