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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28082
Experience:  Taxes, Immigration, Labor Relations
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I use HR Block online to prepare my taxes. I have two sons

Customer Question

I use HR Block online to prepare my taxes. I have two sons who qualify as dependents. When I added the second son, the impact on my taxes owed was virtually nothing. I realize there's a phase-out, but AGI is $338,000 (and my filing status is married filing jointly) so I don't see why the phase-out impact would be almost 100%.
Does this experience make sense to you?
Submitted: 9 months ago.
Category: Tax
Expert:  Lev replied 9 months ago.

The issue is

If the amount on line 38 is over $154,950 (that is AGI) - we need to use the Deduction for Exemptions Worksheet to figure your deduction for exemptions.

You might want to locate that worksheet in your software - it is named Deduction for Exemptions Worksheet—Line 42.

So - if you are filing Married filing jointly and your AGI is above $309,900 - deduction for exemptions is reduced significantly - and that likely what you experienced.

Normally each dependent will add $4000 in exemptions - but because of higher AGI - that would be ever lower.

Customer: replied 9 months ago.

The HR block site is useless.

I found this example online:

Married couple with two children and AGI = $347,000: AGI exceeds phaseout start by $37,100 (= $347,000 - $309,900); divide that excess by $2,500 = 14.84, which rounds up to 15. Reduction is 30% (= 15 * 2%) of $16,000, which is $4,800.

Substituting my situation for those numbers, the reduction should be 22%. That means the incremental exemption for my second son should be 78% of $4,000, and assuming a marginal tax rate around 30% that should be worth more than $40!!

Expert:  Lev replied 9 months ago.

Correct.

These calculations are are actually done on the worksheet I mentioned

- it is named Deduction for Exemptions Worksheet—Line 42.

If you are not able to locate it in your tax preparation software - You will find the worksheet in instructions

on page 41

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

You will see here same calculation you mentioned above.

Customer: replied 9 months ago.

I created my own spreadsheet based upon the instructions. It seems as though you and I agree that there should be more than a $40 impact to the taxes I owe based upon the inclusion of my second son as a fourth exemption. So I guess that means the HR Block online tax program is flawed.

Do I start over and go with a different software? That seems like a HUGE burden. But I pay enough taxes that I'll refuse to pay a penny extra because of a flawed tax software.

Expert:  Lev replied 9 months ago.

I do not think that the software is making so simple mistakes.

We need to know the exact reason.

So far - I run that worksheet for one and two dependents - and attaching the difference

Please verify what you have on line 42.

Customer: replied 9 months ago.

I agree completely with your two scenarios. The difference between the two scenarios on Line 8 should be $3,040. Since that's a direct reduction in taxable income, my tax savings should be my marginal tax rate times the $3,040 figure. It's no where near that.

I even took the second son out completely, and it had zero impact on my tax owed. I don't trust this piece of shit program farther than I can throw it.

Am I generating a dollar-for-dollar increase in my alternative minimum tax for each dollar of savings generated by the added exemption???????

Expert:  Lev replied 9 months ago.

If you will be able to share forms - I could verify.

It would be hard to guess...

can you also check what you have on line 45 and line 40 in each situation?

Customer: replied 9 months ago.

No I can't. As far as I can tell, I won't be able to print a form until I pay and file it. That's the biggest problem I have. No way to review all the forms!!!

Expert:  Lev replied 9 months ago.

That is the issue with all online software...

If you download and install software locally - you should be able to see forms.

Customer: replied 9 months ago.

I was able to print out forms with 1 dependent exemptions, and other forms with 2 dependent exemptions. My taxable income does fall by $3,040 with the added exemption, and my tax falls by $1,003. However, my AMT increases by exactly $1,003, so there's no advantage to the second exemption. Annoying.

What triggers the dollar-for-dollar increase in AMT? Is it the President's personal opinion that I don't pay enough tax already?

Expert:  Lev replied 9 months ago.

Ok - at least we know the item which affects your tax calculations.

How Is the AMT Calculated? The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax.

The tentative minimum tax is figured separately from the regular tax. Individuals who claim certain tax benefits may owe AMT because these benefits are available ONLY for regular tax purposes.

If you owe AMT, you usually must file Form 6251, Alternative Minimum Tax – Individuals.

There are some items which trigger AMT. For instance - in calculating the AMT, we are not allowed to claim itemized deductions for state and local income tax, real estate taxes and personal property taxes, even though these are deductible on your regular return.

So your return is getting more and more complicated.