Bug Report- Incorrect Tax Planner Marginal Tax Rate Displayed in Tax Summary Screen

markus1957

Quicken correctly calculates projected taxes using the correct rates for the applicable income category so this report is strictly related to the Marginal Tax Rate value displayed in the Tax Summary Screen. By not correctly calculating the Marginal Tax Rate, users are led to believe their next dollars of regular income will be taxed at a higher rate than they actually will be.

The calculation used to determine the Marginal Tax Rate to be displayed fails to exclude Qualified Dividend Income (QDI) and Long-term Capital Gains (LTCG) from the equation. It appears Quicken uses the Taxable Income value and compares it to the Tax Rate table to determine which Marginal Rate to display. Quicken should be subtracting QDI & LTCG from Taxable Income before making the comparison to the Tax Rate table to determine which Marginal Tax Rate to display. QDI & LTCG have their own tax rate calculations made separately from regular income. The calculated tax in Tax Planner is correct because the underlying formulas correctly incorporate the separate calculations for QDI & LTCG. It is only the Marginal Tax Rate displayed in the Tax Summary that is at issue.

Stated simply, QDI and LTCG do not cause your Marginal Tax Rate to go up. If all of your income were QDI & LTCG, no matter how high it was, you would still be in the lowest Marginal Tax Rate bracket for your next dollar of regularly taxed income.

To verify the bug, set up a new file (or in your current data file, use the Scenarios feature in Tax Planner) and manually input into the Tax Planner, the Standard Deduction amount as Interest and the second (12%) Tax Bracket amount as Dividend. The Tax Planner Summary screen will show correctly 12% as your Marginal Tax Rate. Now input $100 into the Qualified Dividend input. This drops your regularly taxed income to the 10% Marginal Tax bracket ($100 below 12% bracket amount), but you will see that it remains displayed as 12%. Now add the 22% bracket amount to the LTCG input and you will see the Marginal Tax Rate displayed jump to 22% whereas it should be showing 10% as you still only have $100 less than the 12% bracket amount of regularly taxed income.

Again, Quicken correctly calculates the tax owed because the underlying formulas take into account the separate treatment of QDI & LTCG. It is only the Marginal Tax Rate displayed in the Tax Summary that is at issue and causes users trying to plan their tax obligation to think their next dollars of regular income will be taxed at a higher rate than it actually will be.

Adding- It has come to my attention that Quicken did not update the 0% tax rate threshold for QDI & LTCG to the 2023 values so there is also work to do to incorporate the new tax rate tables for QDI & LTCG into the underlying equations.

https://community.quicken.com/discussion/7934019/tax-planner-seems-to-use-incorrect-threshold-for-capital-gains-calculation

Quicken Jasmine

Hello @markus1957,

Thank you for taking the time to visit the Community to report this issue, though we apologize that you are experiencing this.

We have forwarded this issue to the proper channels to have this further investigated. In the meantime, we request that you please navigate to Help > Report a problem and submit a problem report with log files attached in order to contribute to the investigation.

While you will not receive a response through this submission, these reports will help our teams further investigate the issue.

We apologize for any inconvenience! Thank you.

markus1957

I have sent the Problem Report but FWIW, log files do not contain any useful information related to the errant calculations at issue. In fact, the log files submitted in a problem report are only useful for issues related to downloading from FIs and certain cloud processes.

G.2

Markus,

Thanks for confirming the problem with the tax rate thresholds not being updated as I reported. I hope they'll be updated since there's no way to adjust them manually.

In terms of the marginal tax rate issue you're reporting here, I have to disagree with your statement that QDI and LTCG should be subtracted from taxable income when determining the marginal rate. My belief is that while QDI and LTCG are treated differently in terms of the rate at which they are taxed, they are both still considered taxable income and therefore contribute to it as far as a marginal rate calculation is concerned.

To check this, I reproduced the test scenario you described in a Turbotax 2022 file and it reported the same marginal rate that the Tax Planner does. And I also tried various values of QDI and while the tax due changed, reflecting the different tax treatment, the taxable income never changed. Ditto LTCG.

markus1957

@G.2 The Marginal Tax Rate represents the tax bracket rate at which your last dollar of regular income will be taxed. Your test of TT indicates that TT is also in error with respect to the Marginal Rate displayed when QDI & LTCG are present.

I've used TT and have no doubt that TT is calculating the tax owed correctly. If you plugged my example in as I described, you should observe that the actual tax bracket rate TT applied to the last dollar of regular income (not QDI or LTCG) does not match the Marginal Tax Rate they display in the summary page. That is, TT & Quicken are actually using the 10% rate to calculate the tax owed on the last dollar of regular income but they are reporting a Marginal Tax Rate of 12% when QDI is added to taxable income and 22% when LTCG is added. So even though they are correctly applying the 10% tax bracket rate when calculating tax owed for regular income, they are implying that an incorrect rate was used.

With respect to your comment on taxable income, the inclusion of QDI & LTCG as taxable income is not at issue. The issue is that the Marginal Tax Rate displayed should represent the Tax Bracket Rate applied to the last dollar of regular income.

Bob_L

I agree with @markus1957. Marginal rates should reflect the additional tax resulting from an additional dollar of ordinary income.

G.2

Let me be more clear:

Using TT (for tax year 2022):

Total ordinary dividends -> $41775
Interest -> $14700 (over 65)
Reported tax bracket -> 12%, reported taxable income ->$41775, tax due $4871

Add $100 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $4871
Add $1000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $4766
Add $10000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $3686
Add $20000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $2486
Add $30000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $1267
Add $40000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $194

So the tax due scales down based as the QDI increases, but the taxable income (which determines the rate at which additional ordinary income is taxed at - i.e., the marginal rate) doesn't change at all.

markus1957

The tax owed for single filer with $41,775 of regular income is $4,807.50 so something is off with your calculation at the start.

In your last example, all but $10 of the QDI is taxed at a %0 rate so tax should be $1,765 * 10% + $10 * 15% or $178.

G.2

You're right about the tax numbers; TT was adding a tax penalty that I failed to notice (I'm using TT 2022 and the due date has passed). No error in the calculation, just my reporting. Corrected results:

Add $100 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $4808
Add $1000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $4703
Add $10000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $3623
Add $20000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $2423
Add $30000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $1223
Add $40000 for QDI -> reported tax bracket -> 12%, reported taxable income $41775, tax due $194
(last case - 15% of $100 (QDI threshold for 2022 was $41675) + 10% of $1775)

Bottom line is that the taxable income (and associated marginal rate) remain constant irrespective of the proportion of QDI, and both TT and the tax planner report the same results.

markus1957

You appear to misunderstand the meaning of Marginal Tax Rate.

Taxable income remaining constant is correct, but it is NOT associated with the marginal rate. They are separate and distinct parameters calculated using different inputs. The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax.

The marginal tax rate reported by TT is NOT correct for the last case as you clearly show regular income being taxed at 10%. The other cases all correctly show the marginal rate as 12% because the last/next dollar of regular income is taxed at 12%.

https://taxfoundation.org/tax-basics/marginal-tax-rate/#:~:text=The%20marginal%20tax%20rate%20is,would%20be%20taken%20as%20tax.

G.2

Thanks very much for your response. Actually, I do get what a Marginal Tax rate is. It is determined by the taxable income, and the basis of your bug report was that QDI or LTCG should not be considered taxable income. But of course the IRS established tax thresholds and tax rates for both so I don't quite follow that rational.

To your point about the last case, the value of the total dividends is right on the bracket threshold, so yes, the next dollar earned is indeed in the next bracket (12% in this case). The actual tax due of course would be calculated using the preceding bracket....

Thanks very much for all of your input, and I suppose it's up to the Quicken and TT developers to decide on how they want to implement the code.

markus1957

@G.2 you are mistaken that the basis of the bug report was that QDI & LTCG should not be considered taxable income. Taxable income displayed is correct, it is simply that QDI and LTCG should not be used to determine the marginal tax rate. You should reread the OP where I clearly state, "It is only the Marginal Tax Rate displayed in the Tax Summary that is at issue."

You are also mistaken that the Marginal Tax Rate is determined by taxable income. It is actually determined by the sum of income required by the IRS to have tax owed calculated using the tax rate tables. The highest tax rate in the tax table used to calculate the tax obligation for the sum is the Marginal Tax Rate. Some would argue that it is actually the sum plus $1.

Regarding the last case calculation, you are wrong when you indicate the next dollar of regular income will be taxed at 12% when in fact it will be taxed at 10% because the last case falls $8,500 short of the 12% tax bracket threshold ($10,275-$1,775). You can prove this by increasing the ordinary dividend value in the last case by $100 to $41,875 and leaving the other values as they are. By your accounting, an additional tax of $12 (12% of $100) should be realized but you will see that the tax will only go up by $10 (10%) because the Marginal Tax Rate will continue to be 10% until the $8,500 cushion to exceed the 10% bracket is used up.

G.2

"Regarding the last case calculation, you are wrong when you indicate the next dollar of regular income will be taxed at 12% when in fact it will be taxed at 10% because the last case falls $8,500 short of the 12% tax bracket threshold ($10,275-$1,775). You can prove this by increasing the ordinary dividend value in the last case by $100 to $41,875 and leaving the other values as they are. By your accounting, an additional tax of $12 (12% of $100) should be realized but you will see that the tax will only go up by $10 (10%) because the Marginal Tax Rate will continue to be 10% until the $8,500 cushion to exceed the 10% bracket is used up."

Results of above test (using TT 2022) -> tax due goes from $194 to $219. Houston, we have a problem....

markus1957

Actually that is correct because the extra $100 bumps another $100 of QDI from 0% to 15% or $15. Then add the extra $10 from 10% marginal tax rate to get to $25 additional tax. Filling that 0% QDI/LTCG bucket gets complicated but I should have picked that up. My mistake, but we're still at 10% marginal rate.

Bob_L

The reason taxes go up by $25 instead of $10 in the last example is because the extra $100 of taxable income bumps you into the 15% capital gains rate, instead of 0%. So ordinary income can in fact trigger higher capital gains taxes and thus higher total taxes at the edge of the brackets.

The question then becomes how to define a marginal income tax rate. Are you really in a 25% bracket at this point? I think not. That is, If you add another 1000, I'm guessing your taxes will increase by another $100 due to the 10% bracket, but capital gains taxes will remain the same because they are already in the 15% bracket and no additional taxes are required.

IMH

G.2

Adding $1000 of ordinary dividends yields a tax liability of $469, which effectively means a 25% bracket. Again, this as far as TT 2022 results are concerned.

For me the upshot of all of this is that in presence of QDI and LTCG, the marginal rate is of quite limited utility in terms of financial planning - too many confounding variables - and the only thing really to do is run differing scenarios.

Thanks for the discussion.

Bob_L

Thank you, My bad! I agree the complexity of the tax code makes traditional ratios such as marginal income difficult at best.

markus1957

I have heard thru the grapevine that the LTCG/QDI rate thresholds will be updated with 2023 values in the next release. The marginal rate calculation will also be fixed and in the process of working on this issue they found/fixed one of the causes of tax planner buggy behavior.