The effective tax rate calculation in TurboTax CD/Download is "correct." However, depending on which report you are reviewing, it may not seem like it, e.g. Tax History Report.
You may calculate different types of tax rates by reviewing your tax returns. Please note tax rates are different from tax brackets (What is My Tax Bracket?).
A common standard is an effective tax rate. Generally, an effective tax rate is calculated by dividing Adjusted Gross Income (Form 1040 Line 38) by Total Tax (Form 1040 Line 63). However, you could also use different amounts for the numerator and/or denominator to calculate different types of tax rates depending on what line items you wanted to include/exclude, e.g. Taxable Income (Form 1040 Line 43) / Total Tax (Form 1040 Line 63).
In TurboTax CD/Download products, effective tax rate is currently defined as the following:
Effective tax rate:
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.
