Why is 1250 unrecaptured taxed at 25% on all amounts above 15% instead of 22% and 24%? Prior brackets jumped from 15% to 25% so it made sense?

[TaxGuyBill · Accepted solution]

It works correctly for me.

I added $1000 of Unrecaptured Section 1250 Gain to a tax return in the 22% tax bracket, and it added $220 of income tax.

You may want to look at the entire tax return to see if anything else changed besides regular income tax.  For example, the 'extra' income could reduce some credits or deductions or be subject to the Net Investment Income Tax or possibly even AMT.

[mashman]

Did it calculate tax on the Sch D Tax worksheet or the Schedule D Tax Worksheet.  The Sch D Tax worksheet just has a flat rate of 25% on the unrecaptured.  My client is better off calling it ordinary income.

[mashman]

I meant the Schedule D tax worksheet or Qualified Dividends and Capital Gain Tax Worksheet.  My client is using the Schedule D tax worksheet.  This is their only capital gain.

[TaxGuyBill]

Just because Line 38 of the Schedule D worksheet shows a tax at 25% does NOT mean it is actually being taxed at 25%.  Look at Lines 42-45.

If you look at the income tax on the 1040 then remove the 1250 gain from the program, you will see that it is not being taxed at 25%.

[mashman]

I changed the 1250 unrecaptured to 1245 ordinary recapture and the tax decreased to the 22% and 24% rates I thought I should get with the 1250.  It is causing the taxpayer to pay more tax on the 1250 unrecaptured than they are paying on ordinary recapture.  

[TaxGuyBill]

Have you confirmed that Line 11a of the 1040 is increasing by 25%?  As I said before, it is working for me.

Where exactly are you entering the sale?

[mashman]

The sale is reported on 4797 part III.  I have confirmed that the 11a is increasing by 25%.  I convert the gain to 1245 recapture and the tax is right off the tax schedule.  I leave it at 1250 unrecaptured and it increases over section 1245 as it is taxed at 25%.  I really appreciate your time on this.  Thank you I will contact ProSeries and see what technical has to say.  I have seen items on the WEB that say it is now a flat 25%, but that is not in the law and it would make no sense.  I feel like I have done some little thing wrong and just need to tweak the entry somewhere.  Thanks again.

[TaxGuyBill]

I am unsure why the program would be doing that, unless it is a 'bug' with specific circumstances (as I said before, it works on my test file).

You didn't enter anything on Line 26 of the 4797, did you?

[mashman]

no nothing on line 26.  Either I just entered something wrong or as you say this is a specific set of facts or circumstance.