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Effective Tax Rate on 2023 Taxes, not added up

Forum|Forum|1 year ago
October 19, 2024
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Hi - I need some help. I am reviewing my 2023 Jt Return for NJ. We have a Taxable Income of $76,713, which should put our Effective Tax Rate somewhere between 10 & 12%, using the progessive taxing method (Our taxable income falls within the 12% bracket). However, the Effective Tax Rate on our return shows only 6.15%. Our Total Tax was $6520.00. If you divide that by the taxable income, you get 8.5%...still doesn't make sense because it's below 10%. I am confused!

All figures are here:

Taxable Income - 76,713

Total Tax - 6520

Total Payments/Credits - 2169

Payment Due - 4351

Penalty/Int - 93

Bal Due w/ Penalty/Int - 4,444.00

Effective Tax Rate - 6.15%

Again, if our Taxable Income is 76,713 and we fall in the 10-12% bracket, how is TT calculating 6.15%??

Thank you in advance for helping me understand how the numbers are calculated.

Ultimately, I am trying to calculate our Estimated 2024 income.

Best answer by taxlady28

The effective tax rate that TurboTax computes has no relation to the rate of tax that you actually paid. It is a very confusing figure that causes a lot of questions and I wish it would just go away.

rjs

All the information that you provided is from your federal tax return, not your New Jersey tax return. TurboTax does not calculate an effective tax rate for New Jersey.

The figure that TurboTax calls "effective tax rate" is based on Adjusted Gross Income (AGI), not taxable income. It makes adjustments in its calculation for a number of uncommon situations. Try dividing the tax on Form 1040 line 16 by your AGI on line 11 and see if you get 6.15% or something close to it.

UPDATE: Instead of using the tax on Form 1040 line 16, try using the total tax on Form 1040 line 24. That should get you closer to the effective tax rate that TurboTax calculated.

I'm not sure what you mean by "the progessive taxing method," but the tax brackets apply to taxable income, not AGI. So you cannot compare the effective tax rate, which is based on AGI, to the tax brackets that apply to taxable income. The effective tax rate has nothing to do with the rates that are used to calculate your tax. The effective tax rate is just meant to give you a bird's eye view of what percentage of your total income you are paying in federal income tax. That also means that you cannot use the effective tax rate to estimate your 2024 tax.

You said "I am trying to calculate our Estimated 2024 income." TurboTax can't estimate your income, and the effective tax rate doesn't tell you anything about your expected income. You have to figure out how much income you expect to have from your various sources of income. If you mean that you want to estimate your 2024 tax, there are various ways to do that once you have an estimate of your 2024 income. One tool you can use is TaxCaster. It's still set up for 2023, but there are not likely to be any major changes for 2024, so it will give you a good rough estimate of your federal tax. You didn't say whether you are using TurboTax Online or the CD/Download TurboTax software for 2023. If you are using the CD/Download software you can use the What-If Worksheet in forms mode to estimate your 2024 tax. It has a box at the top of each column that you can check to use 2024 tax rates.

rjs

After further investigation, it appears that TurboTax calculates the effective tax rate using the total tax on Form 1040 line 24, not the tax on line 16. Divide the total tax on Form 1040 line 24 by the Adjusted Gross Income (AGI) on Form 1040 line 11 and see if you get 6.15%.

I have added an update to my earlier answer above to make this change.

D

dzittin

In my situation, line 16 is divided by line 11, representing Tax divided by Total Income. Total income encompasses items such as IRA contributions, which are certainly part of your total income, although taxes are deferred.

Example: Billbob's total income was $50,000 and he made a $5,000 IRA contribution. His adjusted income is $45,000 (see line 10). So when calculating the effective rate, it seems reasonable that he would include his IRA contribution as part of his earnings to calculate the effective rate, or $50k in this example, not $45k. Using the lower value (45k) yields a higher effective rate as per this post's original calculation. (See line 10 on the 1040 form and schedule 1).

FWIW, in my case line 24, total tax, is a value derived from subtracting a tax credit from line 16 and adding a self-employment tax, yielding a higher value. I am not sure why these values preclude TT from using line 24 as the denominator. That's for another day.

T

taxlady28Answer

The effective tax rate that TurboTax computes has no relation to the rate of tax that you actually paid. It is a very confusing figure that causes a lot of questions and I wish it would just go away.