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Is effective tax rate calculation misleading or just wrong?

In the Tax History report, Turbotax calculates an effective tax rate, but does not include 'Other Taxes' in that calculation.  The 3.8% Net Investment Income Tax happens to be lumped into 'Other Taxes' on the IRS forms, hence is not used in TurboTax's effective tax calculation.

Since the additional 3.8% is an income tax on investment income, shouldn't it be included in the effective tax rate calculation?

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16 Replies
jrbader1
New Member

Is effective tax rate calculation misleading or just wrong?

I just spoke with a TurboTax rep and he cleared it up for me. My pdf output was the following:

===

Adjusted Gross Income $ 136,999.00

Taxable Income $ 110,565.00

Total Tax $ 25,607.00

Total Payments/Credits $ 33,946.00

Amount to be Refunded $ 8,339.00

Effective Tax Rate 14.04%

===

The way they end up with 14% is {Refund / (Total Tax + Total Payments/Credits)} = 8339 / (25,607+33,946) = 14%.

Not only does this in no way reflect my effective tax rate, but it is a completely meaningless metric: My refund as a percentage of the sum of my tax and my payments. Seriously?

I can only conclude that this is a bug in their software and I hope that this comment puts those users at ease that were similarly concerned when they saw their calculated effective tax rate.

Is effective tax rate calculation misleading or just wrong?

Can't agree more.  That calculation makes absolutely no sense.

Seems to me that "Effective Tax Rate" should be Total Tax/Adjusted Gross Income or 18.69% in your case.
kwokchu
New Member

Is effective tax rate calculation misleading or just wrong?

This "Effective Tax Rate" has been wrong for many many years.  I am wondering why Intuit team does not even bother to correct it?!
rmainer
New Member

Is effective tax rate calculation misleading or just wrong?

How do you speak to a TT rep?
jrbader1
New Member

Is effective tax rate calculation misleading or just wrong?

There's a "Contact" link on their site that can setup a phone meeting. They're not super knowledgeable on taxes, but they do know their software well so I definitely recommend speaking with them directly if you're having any troubles.

Is effective tax rate calculation misleading or just wrong?

"Effective tax rate" is simply the tax divided by AGI.   1040 line 63 divided by line 38 times 100 to get the percentage.

In the example above (25607 / 136999 * 100= 18.69%)
**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.**
jrbader1
New Member

Is effective tax rate calculation misleading or just wrong?

macuser_22, your comment may actually confuse other readers when they see that your comment in no way answers the question of how TT is calculating their "effective tax rate." Furthermore, the correct equation was covered in the first comment. Also, no one here ever asked how to correctly calculate their effective tax rate. Rather, the question was in regards to the calculation performed by TT, which has been found to not resemble anything close to an "effective tax rate."

In short, TurboTax has confirmed that they calculate the "effective tax rate" incorrectly.

Is effective tax rate calculation misleading or just wrong?

@jrbader1 - I meant the total tax (1040 line 63) divided by AGI.  (I corrected)

On a test return I divided line 63  ($26,774) by 38 ($166,779) * 100 = 16.053

The effective tax rate calculated by TurboTax on a PDF printout was 16.05%

That looks fine to me.  Where do you see it different?
**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.**

Is effective tax rate calculation misleading or just wrong?

I agree with the comment that the effective rate has been wrong for years.  To me the effective rate should be either my total tax paid / total income or my total tax paid / AGI or my total tax / taxable income.  This year TT says 17.99 for me but it is really 21.74 or 21.77 or 25.22 depending on which number I use for the denominator.  I had a large AMT one year yielding a 57.9% effective tax rate, but TT reported a much lower effective rate.  It makes no practical sense.

Is effective tax rate calculation misleading or just wrong?

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'.
PWNeely
New Member

Is effective tax rate calculation misleading or just wrong?

I agree with rcj007, effective tax rate should be calculated by dividing the total income tax payable by the total taxable income.  I cannot believe Turbo Tax continues to calculate it incorrectly.  That lessens my confidence in them regarding everything else they do.

Is effective tax rate calculation misleading or just wrong?


@PWNeely wrote:

I agree with rcj007, effective tax rate should be calculated by dividing the total income tax payable by the total taxable income.  I cannot believe Turbo Tax continues to calculate it incorrectly.  That lessens my confidence in them regarding everything else they do.


This is the methodology for tax years prior to 2018 -

 

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.

Is effective tax rate calculation misleading or just wrong?

Another problem not solved for many years.  It appears that unless enough people twitter and @ the CEO, nothing will be resolved at Intuit. 

AJJB
Level 1

Is effective tax rate calculation misleading or just wrong?

Absolutely correct!

My TurboTax calculated Effective Tax Rate was 17.26% using the erroneous/misleading calculation.

It really should have been 18.96% using my total tax divided by my taxable income. A difference of 1.7%

How hard is it for them to correct this error. They're constantly updating the Federal and State software. Correcting the Effective Tax Rate problem would be soooo simple.

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