Calculating Effective Tax Rate

[jmillernj]

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]

Delete answer due to incorrect information in On Demand Guidance.

[SteamTrain]

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.   

[DoninGA]

@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]

@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

[Critter-3]

It is not a simple calculation in many cases ... so you are in luck ... TT has worksheets for almost everything and even some worksheets have worksheets ... so save a PDF of the return WITH the worksheets and review them ...

To access your current or prior year online tax returns sign onto the TurboTax website with the userID you used to create the account - https://myturbotax.intuit.com/

Scroll down to the bottom of the screen and on the section Your tax returns & documents click on Show.  Click on the Year and Click on Download/print return (PDF)

Or –

When you sign onto your online account and land on the Tax Home web page, scroll down and click on Add a state. 

This will take you back to the 2019 online tax return.

Click on Tax Tools on the left side of the online program screen.  Then click on Print Center.  Then click on Print, save or preview this year's return.  

Choose the option Include government and TurboTax worksheets

[jmillernj]

Line 26 was a typo in my original post - should have been line 16 (2019 form 1040). Sorry for any confusion.

[jmillernj]

It would be nice if TT included a worksheet showing how they compute their "Effective Tax Rate" so the question of why it differs from a simple, common interpretation ( Tax / Taxable Inc ) of effective rate would not have to be asked.

[Critter-3]

Although the figure is "nice to know" since we have a graduated income tax system it is really not part of the income tax return so although TT gives you the number they do not show you the computation. 

https://money.usnews.com/money/blogs/my-money/articles/how-to-calculate-your-effective-tax-rate#:~:t...).

[RAS43]

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]

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]

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.