Effective tax rate

[mesquitebean]

As a fellow user and not a TurboTax insider, I suspect TurboTax uses some less-common proprietary method  that doesn't follow the simple conventional definition.   When you read through this entire thread, you can see others debating it above.

[DawnC]

Your “effective tax rate” is the average percentage of your taxable income that you owe in federal taxes. @mhotalin 

[wendy3152020]

So the effect tax rate is Total tax/ Taxable income, correct?  But, On Tubor tax statement, page 1 of the Federal tax return summary, the result total tax / taxable income is different than the Effective tax rate provided. the calculated Effect tax rate (Total tax/ Taxable income) is way bigger than the Effective tax rate provided. Why does turbo tax provide a different (smaller) effect tax rate on the statement? 

[LindaS5247]

As your earnings increase throughout the year, you generally move from one tax bracket to the next as your income grows.  

Your marginal tax rate is the highest tax bracket that you are taxed in as your income grows throughout the year.

The actual percentage of your total income at the end of the year that gets paid to the IRS as taxes is generally different, and is usually referred to as your effective tax rate. 

The rate you pay on the last earnings you make, which is your highest marginal tax rate or top marginal rate, is usually much higher than your effective tax rate.

There are many different tax numbers, brackets and rates used for many different applications for a multitude of reasons.  It's easy to confuse them. Make sure you are comparing the same rates from year to year.

You can reduce your taxable income using your standard deduction or by itemizing deductions.

You can reduce the tax you owe if you qualify for credits, including the Child and Dependent Care Credit, education tax credits, and adoption tax credit. These credits reduce the taxes you owe dollar for dollar.
 

Click here for additional information on tax brackets.

Click here for information on lowering your effective tax rate.

Please feel free to come back to TurboTax Community with additional information or questions or click here for help in contacting Turbo Tax Support. 

[john-ct]

You should click on page 1 at the bottom of this discussion and review all the posts from March and April 2023.  Back then, a turbotax customer service rep told me that they divided Total Tax  by AGI (adjusted gross income) instead instead of Taxable Income  to calculate the effective rate.  That didn't make sense to me because the IRS Tax Computation Worksheet  (1040 Instructions, Pg 77) uses Line 15, Taxable Income, not AGI.  I tried using AGI  on figures from my past 5 years returns, and that calculated pretty close to what turbotax was showing (exactly the same in some years).   Turbotax should be using Taxable Income in the effective tax rate calculation, the way the IRS does. 

[LWEME]

Thank you.

[valprice7]

But they actually don't do that.  My total tax divided by taxable income is equal to 25.79%, but the program printed 18.853% as the effective tax rate in the return summary.  This is a VERY large error and it is only made a tiny bit better by dividing by the AGI.  Even using TOTAL income before adjustments, the actual effective tax rate is 21.84% - a 3 point or 16% difference.  I trust TurboTax to get the math correct - what the heck?

[Simada]

Using this formula:

Effective tax rate % = 100 * (Tax + Alternative min tax - Total credits) / (Adjusted gross income)

exactly reproduces the reported value in my "Tax History Report" for the all the years I have been using TurboTax (2019 - 2024).  The formula does not include "Other taxes" (at least the ones I pay).

Hope this helps.

[john-ct]

When I started this discussion several years ago, my return, like that of most people, was was one where there was no difference between line 15 - taxable income,   and  Line 11 - adjusted gross income (AGI).

If however, one has to use the Schedule D Tax Worksheet, and/or the Qualified Dividend and Capital Gain Tax Worksheet, then the two would be different and Tax/AGI = Effective tax rate, as it does for mine.  (I didn't have  any AMT or  Credits as you did.)

[john-ct]

Further to my last post:

If your total tax, line 24 is higher than line 16, your true effective rate is higher than Turbo Tax's computed effective rate, and the higher rate may be needed for tax and investment planning (like comparing the after-tax returns of bond funds and other investments).   It depends on the entries between lines 16 and 24, (like net investment income tax) and whether they are likely to be repeated in the following year.