Question

TurboTax Does Not Know How to Calculate EFFECTIVE TAX RATE

Forum|Forum|2 years ago
December 30, 2023
2 replies
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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.

A

Anonymous_

Employee

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

rjs

Employee

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."

R

rwilsondAuthor

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.