@s2name96 wrote:
I agree with anlkelly. Your effective tax rate is simply the total tax you owe divided by your taxable income. Even the calculation of total tax divided by adjusted gross income that Macuser_22 proposed isn't what TurboTax is calculating. I'm not sure how they're calculating the effective tax rate on my return but it is obviously wrong.
See the explanation by DonInGA in this thread
https://ttlc.intuit.com/community/taxes/discussion/is-effective-tax-rate-calculation-misleading-or-j...
Effective tax rate is computed based on the ratio of tax to income.
Income is the adjusted gross income from Form 1040, line 37. 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 47 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.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
