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I'm using TaxAct online tax software again this year, just like I did the past 4 or 5 years. This time I ran across something unexpected, and I'm hesitant to proceed with entering any more tax information on our return until I can wrap my brain around this one. The strange situation is this: before I entered our stock sale info (purchase date, cost basis, sale date, total sale value, etc.) TaxAct was listing our federal refund at $3,600. After I had entered all of the stock information and it showed a grand total short term capital gain of $952 for the year, our federal refund decreased immediately to $2,200. That seems strange to me, because I was expecting a decrease of about $200 in the refund. In other words, I was expecting roughly a 2% or 3% decrease, and instead I ended up with a 39% one instead. Yowza.

Basically, the issue deals with federal capital gains taxes on our stock sales during 2012. Because we had to sell some stocks to purchase a car midyear, we ended up missing out on the late year rally, and eked out a $952 overall stock gain for the year, once losses on a couple of stocks were factored in. These were all short term gains less than a year, so my understanding is that the gains are taxed at our federal tax bracket.

We are right at $55k total income for our family, which puts us firmly in the 15% tax bracket. (covers up to $72,500 this year) If my understanding is correct, then, there is no way that this $952 stock profit could have pushed us up to the 25% tax bracket, which is the only thing I can think of that could have possibly led to this.

A $1,400 tax increase on a profit of $952 seems like a really bum deal from my end - the equivalent of being taxed at a rate of 147%. (or 47% more than the increase in income) Either I'm totally missing something, or this doesn't make any sense at all to me. Perhaps I am totally missing something about how taxes work on stock gains (capital gains). If so, I would greatly appreciate it if someone could help educate me on this.

(I have triple checked all of the stock purchase dates, sale dates, cost basis, sale price, etc. I do not believe there are any typos or other problems with the entries that could account for this)

If any of you have ever run across something like this before, or might have a guess as to what is causing it, I'm all ears! (and thanks)

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I wish - turns out that I already used the losses to balance out other gains last year. They are all used up!

IStillPickUpPennies (Apr. 20, 2013 @ 6:31a) |

I wish to pay more tax because of more gain, not loss.

gremlins718 (Apr. 20, 2013 @ 9:00a) |

Printing 1040 page 2 with and without the capital gains would have showed you exactly where the money was going.
EIC $xx... (more)

taxmantoo (Apr. 20, 2013 @ 10:16a) |

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Assuming that there is no error, most likely you phased out of a tax credit.

Double and triple check your profit/loss. If your profit was fat fingered to say be 9520, the taxes would turn out right.

update your TaxAct

There is no way $952 in income can increase your tax $1,400. Either you phased out of a credit, you entered a number incorrectly, or TaxAct is calculating something incorrect. Can you view the actual form in TaxAct? If so, take a look at the form and see if all the numbers and math are correct.

Print out the forms with and without the capital gain being entered. See what else changes.

stanolshefski said:   Assuming that there is no error, most likely you phased out of a tax credit.

This

Try this - remove capital gains/losses from your return and increase your w-2 income by $952. If it still shows $2200 refund, you were phased out of some credit. If it doesn't change refund by that much, then the issue is with entering capital gains/losses.

>Try this - remove capital gains/losses from your return and increase your w-2 income by $952. If it still shows $2200 refund, you were phased out of some credit. If it doesn't change refund by that much, then the issue is with >entering capital gains/losses.

Hey, that's a great idea! I hadn't thought of that, but it would help me figure out what is going on. I'll try doing that this evening.

why do people care so much about "being pushed into a higher tax bracket" when the US has a graduated income tax ??

i've noticed with other tax software in previous years that sometimes an entry will temporarily cause a large increase or decrease in tax owed or refunded. it got corrected by itself later .....ymmv.

Tax Act lets you view all the forms. I would take a look at the relevant form and then remove the stock sale and then look again. It should give you an idea of what's going on. Another option is to print your whole return with and without the stock sale. Good luck and please let us know what you find.

You could always go to IRS.gov and print out a form and, god forbid, use a pencil to fill it in so that you understand how the software actually gets to the end result...

There are some credits that, with children, permit a relatively high earned income to still be eligible, but including a very small amount of interest/investment income will disqualify you.

Glitch99 said:   You could always go to IRS.gov and print out a form and, god forbid, use a pencil to fill it in so that you understand how the software actually gets to the end result...
Amen.

TaxAct ended up getting back to me with the following answer:

"Entering income can have more influence on your return then just simply your tax liability calculation. Numerous credits and/or deductions are contingent on your income level.

In your case, this additional investment income affected your Earned Income Credit (EIC). For the EIC, you can NOT have investment income over $3200. For the EIC, investment income consists of interest and dividends, capital gain net income, royalties and rental income from personal property, and passive activities. Passive activities include rental income reported on Schedule E. Prior to entering your capital gain income, your investment income for EIC purposes solely consisted of your rental income from Schedule E, which totaled $2973. This total was under the $3200 threshold and therefore the EIC calculated a credit of $1305 based upon your income. Once you entered your capital gain income ($952) this combined with your passive activities gave you total investment income for EIC purposes of $3925 which was over the $3200 threshold. Therefore you were no longer eligible for the EIC.

Therefore the $1400 change you saw in your refund consisted of the EIC no longer applying ($1305) and the 10% tax due on the capital gain income ($952 x 10% = $95)."

So, it appears that without adding the stock income, we would have come in just under the $3,200 limit. However, with the stock income, we come in $725 over the limit, and end up decreasing our tax refund by $1,400.


I'm starting to think that maybe my father in law is right, and that I should just dump all the $$ into several ETF's long term, (then ignore them) instead of actively managing it. I mean, technically we actually ended up with a ~$400 tax LOSS on the stock investments instead of a $950 gain because of this.

On the other hand, long term our receipts from the rental property are likely to increase since we have most of the repairs finished. Therefore, I guess it is not likely that we would often qualify for the higher tax refund anyway, so maybe I shouldn't let it affect my investing after all. Hmm.

xoneinax said:   why do people care so much about "being pushed into a higher tax bracket" when the US has a graduated income tax ??

Not saying this is true for the OP, but people seriously don't understand how marginal tax brackets work. I've heard professionals in my office worrying about getting a raise and ending up with less net income due to increased tax bracket.

IStillPickUpPennies said:   I'm starting to think that maybe my father in law is right, and that I should just dump all the $$ into several ETF's long term, (then ignore them) instead of actively managing it.

Just want to reiterate that your father in law had some great advice (ideally if they're low expense ratio ETFs).

JTausTX said:   xoneinax said:   why do people care so much about "being pushed into a higher tax bracket" when the US has a graduated income tax ??

Not saying this is true for the OP, but people seriously don't understand how marginal tax brackets work. I've heard professionals in my office worrying about getting a raise and ending up with less net income due to increased tax bracket.
This has nothing to do with tax, but my employer requires contributions to health care costs based on salary level. From what I gathered looking at the rates, it's a pretty significant advantage to be salaried at $79,999 versus $80,000.

BrianGa said:   JTausTX said:   xoneinax said:   why do people care so much about "being pushed into a higher tax bracket" when the US has a graduated income tax ??

Not saying this is true for the OP, but people seriously don't understand how marginal tax brackets work. I've heard professionals in my office worrying about getting a raise and ending up with less net income due to increased tax bracket.
This has nothing to do with tax, but my employer requires contributions to health care costs based on salary level. From what I gathered looking at the rates, it's a pretty significant advantage to be salaried at $79,999 versus $80,000.


Just wait until 2014 when everyone who buys their own health insurance through an Exchange will see a substantial decrease in net income when their income increases from 399% of FPL to 401% of FPL!

Jonomatic said:   Double and triple check your profit/loss. If your profit was fat fingered to say be 9520, the taxes would turn out right.

This guy isn't getting enough love.

$9520 at 15% is $1428, pretty much exactly the amount the OP lost.

Don't you have $725 in losses from stock sales from previous years to carry over to your earnings from last year?

depalma13 said:   Don't you have $725 in losses from stock sales from previous years to carry over to your earnings from last year?
Obviously not.

Oh, that's right - "The market tanks five years ago and everyone lost their asses and now have enough losses to carry forward to infinity and beyond..."

depalma13 said:   Don't you have $725 in losses from stock sales from previous years to carry over to your earnings from last year?

I wish - turns out that I already used the losses to balance out other gains last year. They are all used up!

IStillPickUpPennies said:   depalma13 said:   Don't you have $725 in losses from stock sales from previous years to carry over to your earnings from last year?

I wish - turns out that I already used the losses to balance out other gains last year. They are all used up!


I wish to pay more tax because of more gain, not loss.

IStillPickUpPennies said:   
In your case, this additional investment income affected your Earned Income Credit (EIC).


Printing 1040 page 2 with and without the capital gains would have showed you exactly where the money was going.
EIC $xxxx vs $0.00 would have jumped right out at you.



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