TurboTax (wrongly) determines Federal effective tax rate by dividing (total tax minus OTHER TAXES [SE tax, etc.]) by AGI. My calculations confirm that its math is accurate but its method is incorrect – if they mean to limit it to Effective INCOME Tax Rate without considering other Federal taxes on income, it should be (total tax minus OTHER TAXES [SE tax, etc.]) divided by TAXABLE INCOME. Income that is not taxable is by definition not subject to income tax and therefore not part of the calculation.
A married filing joint 2016 tax return having taxable income of $153,587 with total tax (excluding other taxes [SE, etc.] of $29,990 has an ‘Effective Tax Rate’ of 19.5% (20.65% if I include other taxes, in this case SE tax). TurboTax reports an ‘Effective Tax Rate’ of 14.61% – A CONSIDERABLE UNDERSTATEMENT!
Although I believe its method wrong, at the very least, it should define what it means by ‘effective tax rate’ and explain its methodology. One might think TurboTax is a department of the U.S. Government trying to have taxpayers think the impact of Federal taxes on their income is less than it is.
The concept of effective tax rate is a counter-point to 'marginal tax rate' - both of which are based on TAXABLE INCOME'.
