Blended Tax Rate 59%??

[Sunnybunnies]

Hi. I have been using Turbotax for a decade and I have been loving it, however, I came across with this issue this year. I am a single parent, a head of household, and a self-employed and use the standard deduction for Tax 2020. My total income was around 35,000, and the taxable income became around 10,000 after the deduction. Then It says my blended tax rate is 59%. So I owe about $6, 000. It's ok to pay as long as it makes sense, but I do not understand, I do not see anyone with this rate being so high. Would someone explain to me please? Or at least I want to know if it is possible. Thank you!

[Cynthiad66]

Yes.  It is possible.

Simply put, a blended tax rate is a combination of different tax rates based on the type of income on the return.  Your tax return is a complicated computation because, for example, if you have Wages, Self Employment Income and capital gains, just to name a few, each one of them is taxed at different rates.  Self Employment Income is taxed at the regular rate plus self-employment tax (social security), plus  medicare.  

In your case, you file Head of Household, you may also claim the Child Tax Credit, if qualifying child under 17 and maybe Earned Income Credit.  All of this is a different rate that is blended into the different types of income.

I would venture to say that most of the taxes are due to Self Employment Taxes of approximately $5,200.00.

Make sure you received the Child Tax Credit and Earned Income Credit if qualified.  Those would reduce your taxes a lot!

[Sunnybunnies]

Dear Cynthad66,

Thank you for your time to reply. I truly appreciate.

If I could ask you one more question,

my income is only from 1099 and Schedule C, I have no investment income or other.

And the self-employment tax in our state is 15.3%. 

Yes, as you say, after I added the two credits, the final federal tax I owe will be $2500. 

Does this still look possible? 

I know you cannot be 100% sure, just want to know what you think. Thank you!

Your Tax Breakdown	2020
Total Income	$35,583
Deductions	- $25,041
Taxable Income	= $10,542
Blended Tax Rate	x 59.0%
Tax LiabilityThis is how much you were supposed to pay in taxes.	= $6,222

[DianeW777 · Accepted solution]

If you self-employment is $35,583 then the self employment tax on this amount is $5,027 ($35,583 x .9235 x .153). Half of that is allowed as a deduction from your income and then you have the standard deduction of $18,350. Total reduction to your income is $20,864 using only those two numbers. The taxable income is $14,719.

The tax from the tables is $1,485 plus SE tax of $5,027 = $6,512.

The earned income tax credit (EITC) for one child would be $988 and higher with more than one child.  IRS EITC Tables 2020

You would also have the child tax credit of a minimum of $$1,485 (personal tax liability).

Take last year's return and compare it line-by-line to check the differences and you should find out why.  It may be that the income jumped up enough to reduce the EITC. Check line 28, Form 1040, to see if you have the ACTC or refundable portion listed. This may show the other portion and you should also see Form 8812 in your tax file.

EITC came about to help taxpayers in the lower incomes and as a reward for working towards income growth. The tables are structured for the more you make the more you get until you reach the mid range which the maximum.  Then as the income rises and the amounts decrease.  By looking at the tables you will see how and where it changes.

Please add more any additional questions you may have or to clarify some of the information.

[Sunnybunnies]

Dear DianeW777, 

Thank you for your reply.

I was so shocked and focused on the tax rate of 59%....and was not really thinking how my tax has been in the past. Your reply remembered me that the self-employment tax rate is calculated based on the net income, not on the taxable income. Now it make sense. Adding all the credits -----the final effective tax rate became a negative amount. I guess I do not need to worry about the "effective tax rate" next time and just focus on the actual calculation.

Anyway, I have finished the filing. Thank you so much for your help!