Effective Tax Rate
Your actual tax rate—total taxes paid divided by total income. Lower than marginal rate because of brackets and deductions.
What You Need to Know
Effective tax rate shows what percentage of your total income actually goes to taxes. Calculate it by dividing total tax paid by total taxable income.
Unlike marginal tax rate (the rate on your last dollar earned), effective rate accounts for progressive tax brackets. If you earn $100,000 and pay $15,000 in federal taxes, your effective rate is 15%—even if your marginal rate is 24%.
This matters for comparing tax situations across income levels and understanding true tax burden. Someone in the 32% marginal bracket might only have a 20% effective rate after deductions and lower bracket portions.
Use effective rate when budgeting annual tax liability or comparing tax strategies across years.
Sources & References
This information is sourced from authoritative government and academic institutions:
- irs.gov
https://www.irs.gov/pub/irs-soi/soi-a-ints-id1703.pdf
Related Calculators & Tools
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Related Terms in Taxes
Itemized Deductions
List of specific deductions (mortgage interest, charity, medical, taxes) that can exceed standard deduction and lower taxable income.
Ordinary Income
Income taxed at regular rates—wages, salary, interest, short-term capital gains. Taxed higher than qualified dividends and long-term capital gains.
Taxable Income
Income that's actually taxed after subtracting deductions from AGI. Used to determine tax bracket and total tax owed.