# Question about effective tax rate

D

#### Dwayne Hoover

I just did my joint tax return on turbotax. I printed it out
and I noticed that I had an effective tax rate of 12%. That
sounds awefully low. Now my wife and I had a child this year
so we get \$1000 for that and also my wife only worked for 6
months so I suppose she was being taxed as if she was
working for the year - is that enough to bump us up? It's
just the first time I've done this myself so I'm a little
worried about sending it in just in case I missed something.
Is it normal to have a 12.5% effective tax rate?

Taxable Income \$ 80,164
Total Tax \$ 12,659
Total Payments \$ 20,671
Refund \$ 8,012
Effective Tax Rate 12.52 %

P

#### Phil Marti

Is it normal to have a 12.5% effective tax rate?

Taxable Income \$ 80,164
Total Tax \$ 12,659
Well, it appears to be normal for you for 2003. To those of
us who aren't procreating it's low. Without your blessed
event your tax would have been \$14,426, for an effective tax
rate of 14.3%. If you want to feel better, this doesn't
local income taxes, nor sales taxes, nor property taxes, nor
excise taxes, etc.

Phil Marti
Topeka, KS

B

#### Bill

Dwayne=A0Hoover posted:
I just did my joint tax return on turbotax. I
printed it out and I noticed that I had an
effective tax rate of 12%. That sounds
awefully low. Now my wife and I had a child
this year so we get \$1000 for that and also my
wife only worked for 6 months so I suppose
she was being taxed as if she was working for
the year - is that enough to bump us up? It's
just the first time I've done this myself so I'm a
little worried about sending it in just in case I
missed something. Is it normal to have a
12.5% effective tax rate?
Taxable Income =A0 =A0 =A0 \$ 80,164
Total Tax =A0 =A0 =A0 =A0 =A0 =A0 \$ 12,659
Total Payments =A0 =A0 =A0 \$ 20,671
Refund =A0 =A0 =A0 =A0 =A0 =A0 =A0 \$ =A0 8,012
Effective Tax Rate =A0 =A0 =A0 12.52 %
The Tax Table chart shows 13,664 as tax due for that taxable
income; however, you may well have had tax credits which
reduced the final amount. In fact, since you had a child
born last year, you would certainly have a \$1,000 Child Tax
Credit (with no \$400 advance payment, since the child didn't
exist in the filing of your 2002 return). That would bring
your "net" tax due -- on line 54 -- to \$12,664. The other
\$5 differential could be from Qualifed Dividends and Capital
Gain Distributions which result in a slightly lower tax
rate, with the calculation on page 2 of Schedule D or from a
worksheet.

So your actual tax due is in the ballpark, but I'm surprised
the printout didn't explain the calculations -- either by
printing the worksheet or showing an actual 1040 page 2,
with the tax credits clearly reflected.

Incidentally, simply subtracting the minimum standard
deduction for MFJ and 3 exemptions (reflecting your new
child), would bring your taxable income to \$82,438 -- with a
Tax Table figure of \$14.226. Subtract the known Child Tax
Credit of \$1,000, and you get \$13,226 as the tax due. So
there must have been some other calculated reason for the
other \$567 difference.

Any way you figure it, the amount due is not remarkable ...
given the facts presented.

The tax reductions of the past two years were genuine, and virtually
*all* taxpayers can see the difference.

Bill

S

I just did my joint tax return on turbotax. I printed it out
and I noticed that I had an effective tax rate of 12%. That
sounds awefully low. Now my wife and I had a child this year
so we get \$1000 for that and also my wife only worked for 6
months so I suppose she was being taxed as if she was
working for the year - is that enough to bump us up? It's
just the first time I've done this myself so I'm a little
worried about sending it in just in case I missed something.
Is it normal to have a 12.5% effective tax rate?

Taxable Income \$ 80,164
Total Tax \$ 12,659
Total Payments \$ 20,671
Refund \$ 8,012
Effective Tax Rate 12.52 %

B

#### Bob Sandler

I just did my joint tax return on turbotax. I printed it out
and I noticed that I had an effective tax rate of 12%. That
sounds awefully low. Now my wife and I had a child this year
so we get \$1000 for that and also my wife only worked for 6
months so I suppose she was being taxed as if she was
working for the year - is that enough to bump us up? It's
just the first time I've done this myself so I'm a little
worried about sending it in just in case I missed something.
Is it normal to have a 12.5% effective tax rate?

Taxable Income \$ 80,164
Total Tax \$ 12,659
Total Payments \$ 20,671
Refund \$ 8,012
Effective Tax Rate 12.52 %
TurboTax calculates the "effective tax rate" by taking the
tax as a percentage of adjusted gross income. It is
essentially a meaningless number. For one thing, your tax is
actually calculated on your taxable income, not on your
(within a couple of dollars) based on the information you
TurboTax's meaningless "effective tax rate."

Bob Sandler
not a tax professional

H

#### Harlan Lunsford

Dwayne said:
I just did my joint tax return on turbotax. I printed it out
and I noticed that I had an effective tax rate of 12%. That
sounds awefully low. Now my wife and I had a child this year
so we get \$1000 for that and also my wife only worked for 6
months so I suppose she was being taxed as if she was
working for the year - is that enough to bump us up? It's
just the first time I've done this myself so I'm a little
worried about sending it in just in case I missed something.
Is it normal to have a 12.5% effective tax rate?

Taxable Income \$ 80,164
Total Tax \$ 12,659
Total Payments \$ 20,671
Refund \$ 8,012
Effective Tax Rate 12.52 %
income, that's where the 12.52% rate comes into play.

However, to my mind, a more proper way is to divide total
INCOME tax (only; including AMT, but not including any other
credits or SE tax, etc) by TOTAL income.

I used to use this calculation in showing cliens their total
tax bite: income, FICA and state income tax, as a % of
total income. Some times a husband and wife would look at
it, and I would further calculate what we call the marginal
tax rate on just her income alone. Example: her income
of 10,000 with 28% federal, 7.65 FICA and 5% state rate.
Then I would subtract out child care expenses, ask them
added car expenses for her to go to work, and show them her
"marginal contribution to family income". A couple of
wives actually quit work the next month!

Cheer\$\$,
Harlan Lunsford, EA n LA