I have been using HR Block, and the software calculated my tax return, which is kind of surprising to me. I used a free tax estimator and the results are similar:

  • Taxable income $80,600
  • Effective tax rate 2.87%
  • Estimated federal taxes $3,449
  • Federal taxes withheld $12,000
  • We estimate you will get back $8,551

My taxable income is $80600, and with filing status "married file jointly", the tax rate I(we) pay is not 22%?

Why is the federal tax so low?

  • 1
    Did you itemize or take the standard deduction? Did you have any credits or "off the top" deductions to income as well? – Nosjack Feb 7 '20 at 19:04
  • Is your "taxable income" before or after deductions? I'm guessing it's after since it eems like you should have about $120k in total income to get to a 2.87% effective tax rate. – D Stanley Feb 7 '20 at 19:21
  • Even if you haven't gone to the file-and-print stage, HRBlock can show you the actual figures used by going to 'forms' mode and looking at your 1040 -- is your taxable income (after deductions) in 11b what you expect, what's the tax in 12a and 12b, and are there credits in 13a-18e excepting 17? Also does your income include dividends or capital gains on investments like stock? – dave_thompson_085 Feb 9 '20 at 7:26

22% is the marginal rate. In economics, margin is a fancy word for "edge".

This means that you pay 10% on the first $19,400 of your Adjusted Gross Income (income after all deductions have been applied to income), 12% on the next $59,550 and 22% on the next $89,450.

Tax rate    Married filing jointly* 
10%         $0 – $19,400
12%         $19,401 – $78,950
22%         $78,951 – $168,400   <<<<<<<<
24%         $168,401 – $321,450
32%         $321,451 – $408,200

You almost certainly never even made it to the 22% bracket. Because of your MFJ standard deduction, and any 401k/IRA/HSA deductions, 12% is where you landed.

Thus, the $3,449/$80,600 = 4.28% takes into account the deductions (which makes a huge impact), plus 10% and 12% rates.

BTW, you (and your spouse, if the person also gets a W-2) really need to fill out a new W-4 with correct values, so that this year you aren't lending the Feds $713/month!!!

  • @user4556274 I said that in the third paragraph: "You almost certainly never even made it to the 22% bracket because of your MFJ standard deduction, and any 401k/IRA/HSA deductions." – RonJohn Feb 7 '20 at 19:08
  • @user4556274 the brackets are to show the marginal rate. I'll edit that paragraph, though. – RonJohn Feb 7 '20 at 19:12
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    AGI (now line 8b) only has some deductions taken; taxable income (line 11b) has all of them. – dave_thompson_085 Feb 9 '20 at 7:20

You are in the 22% tax bracket meaning that every extra dollar you make at this point will be taxed at 22%. Married filing jointly, the first $19,400 of taxable income is not taxed, the next $59,550 is taxed at 12%, the next $89,450 is taxed at 22%, and so on.

The tax is applied to your taxable income (gross income after deductions), the tax calculated on that, and any tax credits applied to the total tax due. My guess is you have some child tax or other credits that lowered your tax by about $3,700.

The effective tax rate is your total tax due divided by your total income (not just taxable) which is often much less than your tax bracket.

I would recommend adjusting your withholdings for 2020 so that you don't loan your money to the government for free. If you're not comfortable doing hyper-accurate tax calculations, and your tax situation will not be significantly different (no children, no extra income, etc), then you can adjust your withholdings so that your tax withheld is about $700 per month less, reducing your refund next year to about $100. Then you can use that money more effectively during the year.

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