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
Active Income
Active income is earnings from work, crucial for meeting immediate expenses and building wealth.
Discretionary Income
Discretionary income is the money left after essential expenses, crucial for saving and investing.
Earned Income
Earned income is money received from working, crucial for tax calculations and financial stability.
Estate Tax
A tax on the transfer of assets after death, impacting wealth distribution and inheritance.
Estimated Taxes
Estimated taxes are prepayments of income tax owed, helping you avoid penalties and manage cash flow.
Generation Skipping Transfer Tax
A tax on transfers to beneficiaries two or more generations below you, preventing tax avoidance.