Your “effective tax rate” is the average percentage of your taxable income that you owe in federal taxes. In order to calculate this rate, you simply divide your tax liability (what you owe) by your total taxable income.
For more information please check Marginal and Effective Tax Rates
Almost
...the effective tax on my forms it's the calculated tax divided by AGI (Gross income, not taxable income) (OK...and then, x100 to get a %)
Some folks in prior years have found some other items that affect the "effective" rate, up or down some....but the number is just a handwaving thing to make you feel somewhat better anyhow.
TT Eff. Tax Rate never is Total Tax/Taxable Inc. for me.
Why???
By that calculation, I get 18.63% vs. 15.879% by TT for Fed.
Make sure you are dividing by AGI (i.e. gross income before deductions) and not taxable income.
Yeah, they sometimes mess around with what exact numbers they use.
But like I've said before.. The "Effective" tax rate is just a handwaving general % number.
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Not sure what they do with any SE taxes due.
Not sure what they do with some tax credits that others may not get, like the child tax credit.
Not sure what they might do for penalties of any kind, like 10% penalty for early Retirment account withdrawal.
the only logical calculation for effective tax rate is Total Tax / Taxable Income. However, TT doesn't seem to do that. After messing around with various combinations, I found that on my return the calculation is:
Total Tax before other taxes (sched 2, line 21 in 2022) / AGI
I suppose you can make a case for this, but I still would prefer the more logical calculation.
From the TurboTax 2022 in-product help, which I see needs to be updated to refer to the correct Form 1040 and Schedule 1 / 2 / 3 line numbers:
Effective tax rate - year 2022
Effective tax rate is computed based on the ratio of tax to income.
Income is the adjusted gross income from Form 1040, line 11. However, if there are lump-sum distributions from qualified retirement plans and special averaging or capital gain treatment is selected on Form 4972, the taxable amount of the distributions is added to the adjusted gross income. Also, if the distributions include net unrealized appreciation in employer's securities, and the option is selected on Form 4972 to include this in the tax calculation, the amount of the net unrealized appreciation is also added to the income.
Tax is calculated starting with the tax on line 15 of Form 1040, including the alternative minimum tax, but not including the recapture tax from Form 8863 (Education Credits) or the tax from the IRC Section 197(f)(9)(B)(ii) election for an additional tax. It does include the tax from Form 8814 and Form 4972. The smaller of the nonrefundable credits shown on line 55 of Form 1040 or the remaining tax is then subtracted. The other taxes shown on lines 57 through 61 on Form 1040 are not added to the tax. Finally, the Fuel Tax Credit from Form 4136, the Child Tax Credit from Schedule 8812, the refundable portion of the American Opportunity Credit from Form 8863, the Net Premium Tax Credit from Form 8962, the Health Coverage Tax Credit from Form 8885, the Credit for U.S. Tax Paid to the Virgin Islands and the Earned Income Tax Credit are subtracted. Note that these credits are refundable tax credits.
The effective tax rate is the tax divided by the income. Because of the refundable credits, the resulting net tax could be negative if the amount of these credits is greater than the tax liability. As a result, a negative effective tax rate is possible.
If the income as defined above is zero or less, the effective tax rate is set to zero.
If you transferred information from last year's tax file, the effective tax rate for all prior years columns comes from the information in your 2021 return.
It's way off for me. I have a large self-employment tax that it's not considering. This is what I see:
TurboTax Effective Tax Rate: 10.42% (on page 1 when it prints the return)
But if I divide Total Tax by AGI then I get 23.2% and if I divide Total Tax by Taxable Income then I get 33.5%. Either way, the 10.42% number that Turbo Tax is printing is way off the mark. I wish I was only paying 10%!
Right...you are including SE tax, and probably shouldn't.
Those who get only W-2 income don't have their SS&Medicare tax included as a part of that calculation, so you shouldn't either.
THUS: from the 2022 Form 1040, TTX appears to use line 22 divided by Line 11 (AGI)
Either that or I "guess" TTX could start including the SE/Medicare/SS taxes for everyone as a part of that calculation, but historically, they haven't.
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Like I said...it's just a handwaving number to see where you sit relative to most everyone else. And perhaps TTX adds in some other taxes from the Schedule 2, even though they don't include the SE tax in the calculation.
You don't have to use TTX's effective rate...use whatever generic calculation you want.
@MayaD, there's a bug in the software.
TurboTax is calculating Effective Tax Rate = Total Tax / Adjusted Gross Income. This is incorrect.
It should calculate Effective Tax Rate = Total Tax / Taxable Income.
Even that it does not match the effective rate number for me. Any one knows exactly how it is calculated in Turbotax?
@kayak-headgear-meddle , Intuit is free to define "effective tax rate" in TurboTax any way that they want, no matter how meaningless the result might be, since there is no legal definition of this phrase in the tax code. As previously stated, Intuit has chosen to define it as Form 1040 line 22 divided by line 11.
No matter how it is calculated, it's still a pretty useless number other than for comparing your tax situation to someone else's.
I think using the descriptor "handwaving number" to describe effective tax rate is misguided. It should be well-defined and yet TT has its own unique calculation not used by anyone else that I'm aware of. In fact, many think tanks that do tax analysis use effective tax rate because it's a practical and efficient way to do year-to-year comparisons. It's certainly far more meaningful than using something like your marginal rate.
"Even that it does not match the effective rate number for me. Any one knows exactly how it is calculated in Turbotax?"
Did you read PaulD CPA's post above? It describes precisely how it's calculated in TT.
"No matter how it is calculated, it's still a pretty useless number other than for comparing your tax situation to someone else's."
Again, to say it's a "useless number" is completely misguided. Doing tax analysis requires you to normalize the data. Using effective tax can be incredibly useful to do comparison's in general and not just comparing yourself to others.
I verified the formula pointed out by dmertz for my last two year's return (line22/line11). It basically ignored the other taxes on line 23. It seems to me it would make more sense if the effective tax rate is calculated by line24/line11. None of situations in PaulD CPA's post applies to me.
Thank you! When I use Turbotax the putative Effective Tax Rate is indeed the Total Tax divided the AGI (not Taxable Income) Yet even the TurboTax info page (https://turbotax.intuit.com/tax-tips/irs-tax-return/what-are-tax-brackets/L8jeM6XaJ##) gives the incorrect information saying "Your effective tax rate is the percentage of your income that you owe in taxes. To find it, divide your total tax by your total income."
I recalculated the Turbo Tax effective rate to be Tax Liability, excluding NIIT, divided by Adjusted Gross Income, not by Taxable Income. I think you should correct your response to help others know exactly how Turbo Tax calculated it.
Yes, the effective tax rate that appears in the Tax Summary on the first page of the filing instructions is the tax liability before Other Taxes divided by the Adjusted Gross Income.
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That formula (1040 line 22 divided by 11) worked for me. It excluded my Self Employment tax.
Thank you for your explanation. I appreciate that you actually tested instead of just throwing out a 'it should be' response.
My printout states 12.02% Effective Rate: clearly the effective rate displayed is incorrect it had me pay 15%
So what do you trust? Did I overpay???
The Effective Tax rate is your:
Effective tax rate doesn't consider SE tax and any penalties.
For more effective information see:
@2020clearwater your actual tax $ is calculated based on schedules, worksheets, tax tables etc. this 'effective tax rate' is just an informational average calculated a certain way defined by TT, which confusingly may not use the exact numbers shown here depending on your 1040 - see previous posts on how it's defined, and see if your 1040 Line 22 divided by Line 11 gets you 12% result.