Calculating Effective Tax Rate

Forum|Forum|6 years ago
September 12, 2020
11 replies
67 views

According to several posts on this topic, Turbotax supposedly calculates an effective tax rate by dividing Total Tax (1040 Line 26) by Taxable Income (1040 Line 11b). However, when I use the numbers on those lines and calculate my effective rate, I wind up with a rate of 19.8% vs the Turbotax summary page calculation of 17.79%. Why does Turbotax underestimate my effective rate?

DoninGA

Level 15

Delete answer due to incorrect information in On Demand Guidance.

SteamTrain

Level 15

not sure where you got that from...no line 26 in 2019 tax forms....you meant 16?

Probably the wrong lines anyhow

It's a handwaving number anyhow, and you may only get an accurate accounting of "exactly" what is used by calling Customer Support during the week (probably not open weekends). A few of us have been puzzling a bit over this exact calculation for a few years now...but mostly it's a "shrug". For a few low income folks with EIC, and child tax credits, it can even be a negative number.

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Try AGI / tax. (For 2019 forms)

Thus: line 16 divided by line 8b (this matches one of my test tax returns, but not others)

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Your Interpretation of "effective" may vary from TTX's interpretation....but AGI is before considering any Deductions and certain credits, and thus is closer to your total income. And, I might argue that "effective" should include tax-exempt $$ too.

a) ...i.e. line 16 divided by ( line 8b plus line 2a)

or maybe before child tax credits too and SE taxes too..so maybe:

b) Line12b divided by ( line 8b plus line 2a)

or maybe some folks might consider the subtraction of line 8a shouldn't be used, so:

c) Line12b divided by ( line 7b plus line 2a)

and perhaps

d) ... any non-taxable portions of a Social Security distribution maybe could be added to AGI too...after all, it is still income you received, but did not add into AGI.

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

DoninGA

Level 15

@SteamTrain I deleted the answer as it was incorrect. My mistake.

That info came straight out of the On Demand Tax Guidance on my 2019 Premier edition for Effective Tax Rate in the Tax History Report. Did not read it thoroughly so it should never have been posted.

Sent a message to the Moderators since both 2018 and 2019 descriptions for the Effective Tax Rate are referring to a Form 1040 prior to 2018.

SteamTrain

Level 15

@DoninGA

I was referring more to @jmillernj use of line numbers...

I didn't see your original answer...But now I understand why you deleted it,

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.......thus, just another orphaned "Help" page (in a buried place too) that needs major corrections, or maybe separate references to each tax year if they are going to post line numbers

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

RAS43

Level 2

The calculation of Effective Tax Rate on the tax return summary is done by dividing the tax after credits and before the 3.8% surtax by adjusted gross income. On the 2019 Form 1040 that is Line 14 divided by Line 8b.

rjnjr3181

Level 2

Turbo Tax effective tax rate is computed based on Adjusted Gross Income divided by Tax. The real effective tax rate is Taxable Income divided by Tax. Turbo tax has their own definition of Effective Tax Rate. It is not the real effective tax rate

RAS43

Level 2

rjnjr3181,

I think you meant Tax divided by AGI and Tax divided by Taxable Income in your post.

TurboTax doesn't use Total Tax (2020 Line 24) to calculate Effective Tax Rate, instead they use Line 22 (2020) divided by AGI (Line 11). For some unknown reason they exclude Other Taxes (Line 23) from Schedule 2. This excludes the 3.8% tax on investment income. I think a better measure of Effective Tax Rate is Total Tax (Line 24) divided by AGI.

Obviously, the effective tax rate can be defined in various ways. I suppose it comes down to what is most useful for the particular situation.