hooray for taxes

April 12, 2007 3:42 PM

Why is my 'effective tax rate' listed on my return much lower than the amount of taxes I actually paid?
posted by jazzkat11 to work & money (6 comments total)

I think we need more information. I assume that's your state return? (Colorado, is it?) Standard or itemized deductions? Single/married? What types of income? Any credits? By "the amount of taxes I actually paid", do you mean the amount calculated on the return, or the amount that was withheld from your wages?
posted by equalpants at 4:45 PM on April 12, 2007

What was your income, adjusted gross income, taxable income, taxes paid, refund, and effective tax rate?
posted by Mr. President Dr. Steve Elvis America at 4:45 PM on April 12, 2007

My soon-to-be CPA friend gives this definition and explanation. I don't understand it, but maybe you will:

"effective tax rate — The ratio of taxes paid to a given tax base. For individual income taxes, the effective tax rate is typically expressed as the ratio of taxes to adjusted gross income. For corporate income taxes, it is the ratio of taxes to book profits. For some purposes—such as calculating an overall tax rate on all income sources—an effective tax rate is computed on a base that includes the untaxed portion of Social Security benefits, interest on tax-exempt bonds, and similar items. The effective tax rate is a useful measure because the tax code's various exemptions, credits, deductions, and tax rates make actual ratios of taxes to income very different from statutory tax rates."

It's using your adjusted gross income, so it is accounting for deductions etc., but at higher income levels a lot of these deductions get phased out, so it can bump up your actual rate. It, like most tax questions, depend really on the taxpayer's situation (income level, dependents, and other income or losses from passthroughs, like from partnerships they are involved in), but that is essentially the answer.

posted by thinman at 5:35 PM on April 12, 2007

I'm looking at a general tax return 'summary' page Turbotax generated for my return. It lists things like adjusted gross income, taxable income, etc. and at the bottom has a 'effective tax rate,' which in my case is 15.29%. However the real taxes that were paid were above 20%. This includes everything: withholding, etc.

Based on your friend's answer, thinman, I can assume that the effective tax rate is an aggregate that takes into account all the different factors, such as deductions, etc?

Maybe I am confusing this with a tax bracket.
posted by jazzkat11 at 5:52 PM on April 12, 2007

Your effective tax rate is, basically, your taxes divided by your income.

If you earned $35,000, paid $3,500 in taxes, and were in the 15% bracket, your effective tax rate would be 10% ($3,500/$35,000).

In my example, you would've had about $12,000 of deductions, making your taxable income about $23,000. 15% of $23,000 is about $3,500.
posted by Mr. President Dr. Steve Elvis America at 6:32 PM on April 12, 2007

Ah, the effective tax is the tax rate that you've basically paid on your entire income without factoring in any deductions. That makes sense.

Thanks.
posted by jazzkat11 at 10:46 PM on April 12, 2007