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In the X% tax bracket, why would $100 of excess income be taxed higher than $X?

Forum|Forum|5 years ago
April 24, 2021
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This question will probably be easy for someone to answer. Let's say I'm in the 32% tax bracket, but not right at the upper limit. As an experiment, if I add $100 of interest income to my tax return, TurboTax reduces my Federal refund by $36. If I add $1000 of extra interest income, TurboTax reduces my refund by $358. I was expecting the reductions to only be $32 and $320, respectively. What could account for the difference? Thanks.

Best answer by VolvoGirl

When you enter one taxable transaction, you can't just watch the monitor. You increased your overall adjusted gross income and with that come many other changes in your return, not just the incremental tax on the one transaction.

Like for example it increased your AGI and that would decrease some deductions if you itemized on Schedule A. And by increasing your AGI it might reduce some credits you were getting like EIC. And can make more of any Social Security taxable.

I once added $6 in interest and the tax went up $12! It pushed me into the next tax bracket. I was right at the line.

VolvoGirlAnswer

Employee

When you enter one taxable transaction, you can't just watch the monitor. You increased your overall adjusted gross income and with that come many other changes in your return, not just the incremental tax on the one transaction.

Like for example it increased your AGI and that would decrease some deductions if you itemized on Schedule A. And by increasing your AGI it might reduce some credits you were getting like EIC. And can make more of any Social Security taxable.

I once added $6 in interest and the tax went up $12! It pushed me into the next tax bracket. I was right at the line.