TurboTax Does Not Know How to Calculate EFFECTIVE TAX RATE

[rwilsond]

I have been using Turbo Tax for 18 years. And for every one of those 18 years Turbo Tax has reported the "EFFECTIVE TAX RATE" incorrectly on the 'summary page' (i.e., the 1st page with heading "Electronic Filing Instructions ..." upon completion of the returns) for Federal Taxes and also for State Taxes. And I don't mean they got it wrong by tiny amounts. These rates are typically under-reported by several percentage points. And this continues to the the case, after many customers have complained to them about it for years.

EFFECTIVE TAX RATE depends on only TWO amounts:  the "TOTAL TAX" and the "TAXABLE INCOME". Once these two amounts have been determined, EFFECTIVE TAX RATE is simply the ratio of  TOTAL TAX to TAXABLE INCOME, expressed as a percentage. Both of these amounts are already reported on the summary (instructions for filing your return page, which is the first page when the return is completed), which makes the calculation extremely easy to get right.

Despite the fact that calculating taxes can be terribly complicated (e.g., when determining the TOTAL TAX and the TAXABLE INCOME), once these two amounts have been determined, the method of calculating EFFECTIVE TAX RATE is at the elementary grade level. How could Turbo Tax still be getting this so wrong?

By some estimates over 40 million tax returns use Turbo Tax, annually. This, despite the fact that Turbo Tax has apparently been unable to recognize and correct this problem for at least 18 years.

[tagteam]

https://ttlc.intuit.com/community/taxes/discussion/effective-tax-rate/00/2793622

[rjs]

There is no standard or official definition of "effective tax rate." Different people have different opinions about what it means and how to calculate it. TurboTax's definition of effective tax rate is different from yours.

TurboTax doesn't say exactly how they calculate the effective tax rate that they display. Basically they use total tax divided by Adjusted Gross Income (AGI). But they make adjustments for certain credits or "other taxes."

[rwilsond]

Maybe there is, as you say, “no standard or official definition”. But a quick look at definitions around the internet for the term "Effective Tax Rate" reveals that this term generally refers to: TOTAL TAX / TAXABLE INCOME, expressed as a percentage. The only variations to this look more like the result of being poorly researched and/or written by the authors.

Turbo Tax's hijacking of a term that once had clear meaning is not just at odds with what 'I' understood the term to generally mean, but it is also at odds with the majority of readily-available definitions; at least for common preparers of our own taxes. From where do you find other variative definitions of this term that are as widely used and accepted as the definition above (TOTAL TAX / TAXABLE INCOME)?

For 2023, Turbo Tax says my Effective Tax Rate is 14.04%. TOTAL TAX / TAXABLE INCOME percentage calculates to 20.0% which is nearly 6 points higher than what Turbo Tax says. And TOTAL TAX / ADJUSTABLE GROSS INCOME gives 17.3%; which is about 3.3 points higher.

So, this stuff is all over the place, and without any kind of useful accompanying definition is misleading. Turbo Tax should either get rid of their imposter ETR, or rename it and define exactly what it is supposed to be.

[stevespen]

I find it interesting that Turbo Tax uses AGI to calculate effective tax rate. I think that's a good way to do it. However, I also use Intuit ProConnect Tax Online and they use taxable income to calculate effective rate. It's the same company as Turbo Tax, so that threw me off when I saw that.

[vdawg]

I just noticed this issue on the summary page for my 2023 tax return. 

Oddly, TT's own website here:
https://turbotax.intuit.com/tax-tips/general/is-it-possible-to-lower-my-effective-tax-rate-what-are-...

says, "Your effective tax rate is the average percentage of your taxable income that you owe in federal taxes. In order to calculate this rate, you simply divide your tax liability (what you owe) by your total taxable income.

In an example on that page, they have a couple that has a total federal tax burden of $12,615 with a taxable income of $100,000.  They calculate their effective tax rate as 12.6%.   That makes sense to me and matches the definition they provide for Effective Tax Rate.

But my summary page shows Taxable Income as ~$115K with Total Tax as ~$40K (I'm self-employed so I pay both parts of FICA tax), but they have calculated my effective tax rate as 5.57%.  According to their own definition, my Effective Tax Rate should be approximately 35%.  Even if they used the Adjusted Gross Income (which would be in contrast to their own website definition above), my AGI was ~$170K, so $40K of federal taxes would equate to approximately 24%.  5.5% is a significant departure from that.

[MonikaK1]

The blended rate you are looking at may only be considering your regular income tax and not your self-employment tax.

A blended tax rate, also known as the effective tax rate, is derived from a number of factors. The effective tax rate for individuals is the average rate at which their earned income, such as wages, and unearned income, such as stock dividends, are taxed. If you received income from a variety of things like stocks and bonds, interest, dividends, or self-employment, they may all play a role in determining your blended tax rate. See this thread for another discussion of this issue.

If your taxable income falls into the 22% bracket, that is actually your "marginal tax rate" - you are taxed at that rate on the portion of your income that falls into that bracket, and the portion under that amount gets taxed at lower rates.

For 2022, married filing jointly, the 22% rate covered taxable income from $83,550 to $178,150.

For 2023, married filing jointly, the 22% rate covers taxable income from $89,451 to $190,750.

The lower brackets also changed for 2023, so the overall calculation has changed.

In other words, your marginal tax rate refers to the tax rate on the last dollar of your taxable income, or the highest tax bracket you fall under. For example, if you're a single filer earning a taxable income of $75,000, your marginal tax rate would be 22% for the 2023 tax year. See this tax tips article for more information.