Effective Tax Rate on 2023 Taxes, not added up

[TerryD]

Hi - I need some help. I am reviewing my 2023 Jt Return for NJ. We have a Taxable Income of $76,713, which should put our Effective Tax Rate somewhere between 10 & 12%, using the progessive taxing method (Our taxable income falls within the 12% bracket). However, the Effective Tax Rate on our return shows only 6.15%. Our Total Tax was $6520.00. If you divide that by the taxable income, you get 8.5%...still doesn't make sense because it's below 10%.  I am confused! 

All figures are here: 

Taxable Income -              76,713

Total Tax -                              6520

Total Payments/Credits -   2169

Payment Due -                    4351

Penalty/Int -                             93

Bal Due w/ Penalty/Int -    4,444.00

Effective Tax Rate -            6.15%

Again, if our Taxable Income is 76,713 and we fall in the 10-12% bracket, how is TT calculating 6.15%??

Thank you in advance for helping me understand how the numbers are calculated. 

Ultimately, I am trying to calculate our Estimated 2024 income. 

[rjs]

All the information that you provided is from your federal tax return, not your New Jersey tax return. TurboTax does not calculate an effective tax rate for New Jersey.

The figure that TurboTax calls "effective tax rate" is based on Adjusted Gross Income (AGI), not taxable income. It makes adjustments in its calculation for a number of uncommon situations. Try dividing the tax on Form 1040 line 16 by your AGI on line 11 and see if you get 6.15% or something close to it.

UPDATE: Instead of using the tax on Form 1040 line 16, try using the total tax on Form 1040 line 24. That should get you closer to the effective tax rate that TurboTax calculated.

I'm not sure what you mean by "the progessive taxing method," but the tax brackets apply to taxable income, not AGI. So you cannot compare the effective tax rate, which is based on AGI, to the tax brackets that apply to taxable income. The effective tax rate has nothing to do with the rates that are used to calculate your tax. The effective tax rate is just meant to give you a bird's eye view of what percentage of your total income you are paying in federal income tax. That also means that you cannot use the effective tax rate to estimate your 2024 tax.

You said "I am trying to calculate our Estimated 2024 income." TurboTax can't estimate your income, and the effective tax rate doesn't tell you anything about your expected income. You have to figure out how much income you expect to have from your various sources of income. If you mean that you want to estimate your 2024 tax, there are various ways to do that once you have an estimate of your 2024 income. One tool you can use is TaxCaster. It's still set up for 2023, but there are not likely to be any major changes for 2024, so it will give you a good rough estimate of your federal tax. You didn't say whether you are using TurboTax Online or the CD/Download TurboTax software for 2023. If you are using the CD/Download software you can use the What-If Worksheet in forms mode to estimate your 2024 tax. It has a box at the top of each column that you can check to use 2024 tax rates.

[rjs]

After further investigation, it appears that TurboTax calculates the effective tax rate using the total tax on Form 1040 line 24, not the tax on line 16. Divide the total tax on Form 1040 line 24 by the Adjusted Gross Income (AGI) on Form 1040 line 11 and see if you get 6.15%.

I have added an update to my earlier answer above to make this change.

[TerryD]

Hi RJS - Thank you for the two replies. I just did the division you suggested and it comes to the 6.15%, as you thought. However, that still doesn't answer my primary question - How can I confirm my Federal Tax Rate (12%), using TurboTax? That's what I am trying to do here, confirm the math on my Federal return, to match-up to the 2023 Federal Tax Rate Chart. I'll reply to your response above too, but thanks for confirming the math above. 

Also, RJS - Can you provide your credentials? Are you a Tax Advisor/Tax preparer? Do you work for Intuit or are you a TT community supporter? I'm a retired engineer/Tech Exec, been doing my own taxes on TT for many many years, but at a point now where we may do some Roth IRA Conversion, hence I want to know (and confirm) our current  Federal Tax rate on TT first (which is my struggle here). After that, I'll want to do an estimate of our 2024 Taxes (not using TT, I know), but on a spreadsheet I made, using new income figures I have prepared. After that, I'll know, what I have to play with, and decide whether to keep us in the low 12% bracket (below the $94,300 max), or whether we want to convert more, and bump us up into the 22% bracket (we're close to it this year, I think), all without risking bumping up into the next tax bracket (24%). That's the exercise I am trying to do here. 

[VolvoGirl]

It depends on what kind of income you have.  There are like 7 different ways to figure the tax.

See the IRS worksheet on 1040 page 36 for how the tax is figured.  Turbo Tax uses the same worksheet.

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

Even though it shows up as income on the first page,if you have capital gains or qualified dividends the tax is not taken from the tax table but is calculated separately from schedule D.  The tax will be calculated on the Qualified Dividends and Capital Gain Tax Worksheet.  It does not get filed with your return.

In the online version you need to save your return as a pdf file and include all worksheets to see it.

For the Desktop version you can switch to Forms Mode and open the worksheet to see it.  Click Forms in the upper right (upper left for Mac) and look through the list and open the Qualified Dividends and Capital Gain Tax Worksheet.  And you will need to use this IRS worksheet on page 15.

https://www.irs.gov/pub/irs-pdf/i1040tt.pdf

If you are using the CD/Download software, go to forms mode and open the Form 1040 or Form 1040-SR Worksheet. Between lines 15 and 16 there is a Tax Smart Worksheet with 7 checkboxes. The box that is checked shows you which of the 7 possible methods was used to calculate your tax. Then you can look for the appropriate worksheet for that method. But if the Tax Table or Tax Computation Worksheet was used, there is no worksheet. Those are simple standardized methods that do not require a worksheet.

[TerryD]

Hi Volvo Girl - Thank you for the reply, but I am not going to jump through 15 complex hoops on TT to find the answer that's already embedded within the TT program..this defeats the entire purpose of using TT...we use it for ease, convenience and to make the lives of regular self tax preparers like me, easier. How about folks like you and others, reach out to Intuit/TT leadership, and get THEM to update TT, so we can easily see our Taxable Income Tax Rate (10/12/22/24, etc) on the front summary page (instead of the useless Effective Tax Rate), on our TT Returns, and match it up/confirm it, with the current Federal Tax Rate Chart.  It's a Software program!! They certainly have to ability to do this. And it's an extremely important update, I might add..Every person using TT should be able to see and understand their tax rate catagory,  without having to jump through 15 exercises, like your suggesting. Thank you anyway for chiming in. 

[SteamTrain]

@TerryD 

Yeah, would be nice to have a Marginal tax rate table easily accessible for those of you who just want to know what rate that the top end of their current "taxable" income is into now...or what it is approaching.  (maybe they do have one...but I haven't looked around lately).

.......or perhaps just as you suggest, simply add an additional line indicating

"Marginal Tax Rate...........22%" 

 or whatever it may be.

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Myself, I always just keep the NerdWallet tables as a bookmark in my Tax bookmark folder for reference 

It shows both the new 2024, and still has the older 2023 marginal tax bracket tables right now):

2024 Federal Tax Brackets and Income Tax Rates - NerdWallet

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Though, there is also a "Community" FAQ page in her that shows the same tax brackets...but sometimes that's not immediately apparent how to find it (and I like the NerdWallet table display layout better):

What are the federal tax rates for 2023?

(Though, the comment remains that too many would just use the table blankly not realizing that some of their taxable income is taxed at a lower rate, and that's why the tax calculated by TTX and what they calculate directly from the table will differ...and even calculating from those tax tables can differ, since taxable incomes below 100,000 use the IRS tax tables.....which aren't smooth )

[taxlady28 · Accepted solution]

The effective tax rate that TurboTax computes has no relation to the rate of tax that you actually paid.  It is a very confusing figure that causes a lot of questions and I wish it would just go away.

[TerryD]

Hi - When you say Margin Tax Rate, I've never heard that term used (I'm not a Tax Pro, I'm a reg guy!)..the term used in Tax Charts is "Taxable Income". When I look at my Taxable Income (line 15), mine says 76,713. So, looking at the Tax Chart, we are in the 12% Tax Bracket (right? - right). So, using the 12% Bracket Math ($2200 plus 12% of the amt over $22,000), for us that that's $54,713 (amt over 22K) x 12% = $6565.56+$2200 = $8765.56. Nowhere on TT does this figure show! Instead, Line 16 Tax shows $7669. I cannot for the life of me figure out how TT came up with that figure, based on the math I just above. Other's are saying it's way more complicated, it's using Cap Gains/Dividends.. we have alot of Cap Losses, form 8949 losses (from alot of Schwab trades, SIP sales, Trades I did, etc), a home energy credit, etc.  Alot of forms from all of our Schwab accts. 

I am spent trying to figure this out. It simply shouldn't be this hard for a guy like me to figure out a simple Federal Tax rate, looking at his TT Return. I am done, spent. Thank you all for your inputs!  

[rjs]

@TerryD 

Your income is not all taxed at the same rate. Different kinds of income are taxed at different rates. So there is no single "Taxable Income Tax Rate" or "simple Federal Tax rate" that applies to all of your income. That's why there are "complex hoops" to calculate your tax.

I'm not sure what you are referring to as "the 2023 Federal Tax Rate Chart" or the "Tax Charts." If you mean the 2023 Tax Rate Schedules in the Form 1040 instructions, note that it says at the top "Don't use [the Tax Rate Schedules] to figure your tax. Instead, see the instructions for line 16." The instructions for line 16 will lead you through all the necessary hoops to calculate your tax. Those instructions stretch over 5 pages, and may send you to other forms.

If you think "It simply shouldn't be this hard" you have to talk to your Congressional representative, not to TurboTax. Congress writes the rules for calculating your tax. TurboTax has to follow the rules that Congress establishes.

I do not work for Intuit. I'm a volunteer in the community. Being designated as a "Champion" means that I have been vetted by the community managers. You can see a bit of my background in my member profile by clicking on the "rjs" at the top of one of my posts.

[TerryD]

RJW - para 1 - I fully understand that. That's why it's called Progressive taxation in some circles. TT should have the ability to calculate each of these income catagories, and put that into a final summary so everyone can understand their final Tax Bracket (or 2023 Tax Rate Schedule, same thing). All the figures and algorithms are already built into TT. Why can't you guys get behind me on this, and ask Intuit to calculate it, and put that into the top summary page? If we do not know where we all stand on the Tax Rate Schedule, then how the heck are we supposed to do any kind of Tax Planning?? 

Para 2 - 2023 Federal Tax Rate Chart (my jargon) = "Taxable Income Tax Rate" - your jargon. 

Para 3 - Yes, it shouldn't be this hard - For Intuit, that is, to calculate our Final Tax Bracket. It has nothing to do with Congress...the tax laws and proper algorithms are all built and programmed into TurbuTax. You know that. Mine s/b between 10-12%...It's got to be 11.xx%. But nowhere is that figure called out anywhere on the TT  summary page, as it should be. What the heck good is "Effective Tax Rate" figure on TT, if it's meaningless and does not match up to the current year Tax Bracket Schedules, posted all over the Internet?

Para 4 - If your a Champion, that also means you should be championing for users like me that are trying to get Intuit to improve their product, so we know our Tax Bracket level is. I can' think of anything more important than knowing your final Taxable Income that can be  matched up into the proper Tax Bracket schedule. Are you willing to do that? 

Thanks again. 

Terry