How does TurboTax calculate my effective tax rate? Seems wrong

TurboTax calculates your effective tax rate using your total tax liability divided by your total income (not just taxable income). That's why the percentage looks different from what you're calculating. When you calculate (Taxes Paid)/(Taxable Income), you're actually looking at your tax bracket rate, not your effective rate. The effective rate considers your total income before deductions, giving you a better picture of what percentage of your overall income goes to taxes. For a simple example: If you earned $80,000, had $15,000 in deductions (making taxable income $65,000), and paid $7,500 in taxes, TurboTax would calculate your effective rate as $7,500/$80,000 = 9.4%, not $7,500/$65,000 = 11.5%.

After struggling with exactly this same confusion last year, I found this amazing tool at https://taxr.ai that explains exactly how different tax calculations work. It breaks down all these formulas and explains why TurboTax and other software calculate things the way they do. I was constantly confused about why my calculated tax rate didn't match what TurboTax showed until I uploaded my tax summary there. It explained that there are actually multiple ways to calculate "effective tax rate" - some use AGI, some use total income, and some use taxable income as the denominator. Each method tells you something different about your tax situation.

I was skeptical too about using taxr.ai at first, but I decided to try it after getting frustrated with TurboTax's vague explanations. I uploaded my tax documents and was shocked at how clearly everything was explained! It showed me that TurboTax was using my AGI (not my total income or taxable income) in their calculation, which is why the numbers seemed off. Even better, it flagged a mistake in how TurboTax had categorized some of my investment income that was causing my effective rate calculation to be wrong. Fixed it and saved over $400! The explanations were so much clearer than anything I found in TurboTax's help section. Now I understand exactly where each percentage comes from.

If you're struggling to get a straight answer from TurboTax about their calculations, you might want to try calling the IRS directly. I know it sounds painful (because it usually is), but I found a service called Claimyr at https://claimyr.com that gets you through to an actual IRS person way faster. They have a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. I was fighting with TurboTax over some weird calculation discrepancies last month, got nowhere with their customer service, then used Claimyr and got through to an IRS agent in about 15 minutes who explained exactly how these tax rates should be calculated. Saved me hours of hold time and frustration.

I'm back to eat my hat! After my skeptical comment I decided to try Claimyr just to prove it wouldn't work. Well, I was totally wrong. Got connected to an IRS agent in 17 minutes (I timed it). The agent explained that effective tax rate calculations vary between software providers because there's no single official IRS definition. TurboTax uses (Total Tax - Refundable Credits)/AGI, which is why it didn't match my calculations. Saved me literally hours of hold time and frustration. I've already told my brother to use it for his tax questions too. Can't believe how well it worked after years of IRS phone hell.

I think TurboTax is also counting your self-employment taxes (if you have any) in the numerator of that calculation. When I was trying to figure this out last year, I found that they include ALL taxes, not just income tax. So if you have SE tax, that gets added in, which makes the rate higher than you might expect.

Has anyone checked if their state taxes are somehow being included in this calculation? I noticed that TurboTax sometimes shows a combined federal+state effective rate and other times shows them separately. Might explain the discrepancy?

I had this exact same confusion last year! What helped me understand it was looking at the actual Form 1040 line numbers that TurboTax uses. Your effective tax rate in TurboTax is calculated as: (Line 24 - Line 19) / Line 11, where Line 24 is your total tax, Line 19 is your total credits, and Line 11 is your adjusted gross income (AGI). This is different from using taxable income because it shows what percentage of your total earnings (before standard/itemized deductions) actually went to taxes. The reason TurboTax uses AGI instead of taxable income is that it gives you a more realistic picture of your overall tax burden. If you want to see the rate based on taxable income (which is what you're calculating), you'd need to use Line 15 as your denominator instead. Both calculations are valid - they just answer different questions. TurboTax's method shows "what percent of my total income went to taxes" while your method shows "what percent tax rate I paid on income that was actually subject to tax.

This is such a common source of confusion! I went through the exact same thing when I first started using TurboTax. The key thing to remember is that there are actually several different ways to calculate "effective tax rate" and each one serves a different purpose. What you're calculating (tax liability divided by taxable income) is sometimes called the "marginal effective rate" - it shows what rate you're actually paying on the income that's subject to tax after all deductions. TurboTax's calculation (tax liability divided by AGI) is the "overall effective rate" - it shows what percentage of your total adjusted income actually went to taxes, accounting for the benefit of deductions and credits. For financial planning purposes, most people find TurboTax's method more useful because it reflects the real-world impact on your total earnings. But your calculation is also valuable for understanding your actual tax bracket and comparing scenarios. Both numbers tell you something important about your tax situation!

I work as a tax preparer and see this confusion all the time! The discrepancy you're seeing is totally normal. TurboTax uses what's called the "economic effective tax rate" which divides your total tax by your Adjusted Gross Income (AGI), not your taxable income. So if you made $75,000 (AGI), had $12,000 in standard deduction (making taxable income $63,000), and owed $6,500 in taxes, TurboTax would show 8.7% ($6,500/$75,000) while your calculation gives 10.3% ($6,500/$63,000). The reason tax software uses AGI is that it gives you a better sense of your overall tax burden relative to your actual earnings. Your method shows the rate you're paying on taxable income, which is also valid but answers a different question. Both calculations have their place - TurboTax's version is better for comparing your tax burden year-over-year or to other taxpayers, while yours shows the actual rate being applied to income subject to tax. You can find your AGI on Line 11 of Form 1040 if you want to verify TurboTax's calculation!

This thread has been incredibly helpful! I've been using TurboTax for years but never really understood these calculations until reading through all these explanations. Just to summarize what I've learned for anyone else who might be confused: - TurboTax uses AGI (Line 11 on Form 1040) as the denominator, not taxable income - This gives you your "economic effective tax rate" - what percentage of your total adjusted income went to taxes - The calculation most of us try to do manually (tax ÷ taxable income) is also valid but shows a different metric - Both numbers are useful for different purposes - TurboTax's method is better for year-over-year comparisons and budgeting I wish TurboTax would just explain this clearly in their help section instead of leaving us all confused! But at least now I understand why my manual calculations never matched what the software was showing me. Thanks to everyone who contributed explanations, especially the tax preparers who chimed in with the professional perspective. This is exactly the kind of detailed breakdown that was missing from TurboTax's documentation.