What Is an Effective Tax Rate?

Effective Tax Rate Explained in Less Than 5 Minutes

Definition

Your effective tax rate is the percentage of your overall taxable income that you pay in taxes. It's usually much less than your marginal tax rate, which is your highest tax bracket.

A taxpayer calculates his effective tax rate at home table with papers in hand
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What Is an Effective Tax Rate?

Your effective tax rate is the average of all the tax brackets the IRS uses for income tiers. You first have to know the IRS tax brackets to understand your effective rate.

You’d be in the 22% marginal tax bracket if you earn $60,000 in the 2021 tax year and you’re single, but you wouldn't pay 22% of your total income in taxes. You’d pay 22% on just your top dollars: $19,475, or the portion over $40,525.

The chart below shows the effective tax rate by income for single individuals for the 2021 tax year, the tax return you’ll file in 2022.

How the Effective Tax Rate Works

You would divide your income by the taxes you paid to calculate your effective tax rate. What makes the effective tax tricky is that two people in the same tax bracket could have different effective tax rates. 

Here’s an example. Someone who earns $80,000 would pay the 22% rate on $39,475 of their income in 2021, the amount over $40,525 in 2021. You would only have to pay a 22% rate on $19,475 of your income at $60,000 in taxable earnings. You would both have the same marginal tax rate of 22%. You would both fall into the same tax bracket.

You would owe $8,991 in taxes on $60,000 in income:

  • $995 on the first $9,950 at 10%
  • $3,669 on $9,951 up to $40,525 at 12%
  • $4,285 on $40,526 up to $60,000 at 22%

The taxpayer who earned $80,000 in taxable income would owe $13,390 in tax:

  • $995 on the first $9,950 at 10%
  • $3,669 on $9,951 up to $40,525 at 12%
  • $8,684 on $40,526 up to $80,000 at 22%

Your effective tax rate would be 14.98%. The second person’s rate would be 16.73%. The second taxpayer has a higher effective tax rate. They made $20,000 more than you did, and they therefore paid more taxes.

Note

Your effective tax rate doesn’t include taxes you might pay to your state, nor does it factor in property taxes or sales taxes. It’s only what you owe the federal government in the way of income tax.

Knowing your effective tax rate can help with tax and budget planning, particularly if you’re considering a significant change in life, such as getting married or retiring.

Effective Tax Rate vs. Marginal Tax Rate

The U.S. tax system is a “progressive” system. It uses marginal tax rates instead of a single tax rate. The more you earn, the more of a percentage you’ll pay on your top dollars.

Your marginal tax rate is 22% at a total taxable income of $60,000. The marginal rate is applied only to your additional income over that certain tax-bracket threshold amount. Your effective tax rate is the average rate you pay on all $60,000. It's a much clearer indication of your real tax liability.

Effective Tax Rate Marginal Tax Rate
$9,950 taxed at 10% = $995 22% on income over $40,525
$30,575 taxed at 12% = $3,669  
$19,475 taxed at 22% = $4,285  
Average of three rates: 14.98%  

How to Get Your Effective Tax Rate

Look at your completed 2021 tax return. Identify the total tax you owed on line 24 of the 2021 Form 1040. Now divide the number on line 24 by what appears on line 15 (taxable income). The result of this calculation is your effective tax rate.

Note

The IRS has redesigned Form 1040 three times, once for the 2018 tax year, again for the 2019 tax year, and once more for 2020. Then the 2021 form underwent some minor tweaks. Your taxes owed were on a different line in 2019 than they are on the 2021 return. 

Do You Pay the Effective Tax Rate on Your Take-Home Pay?

You won’t pay the government your effective tax rate on what you earn during the tax year. You'll pay the applicable rate on your taxable income, what’s left after you subtract any deductions (standard or itemized) and above-the-line adjustments from your gross income.

Your taxable income would be $47,450 if your gross income for 2021 was $60,000 and you took the $12,550 standard deduction for a single taxpayer, assuming that you’re not eligible for any other tax breaks at all. You’re only taxed on the balance of your income after you take every tax break that you’re eligible to claim.

Key Takeaways

  • The federal tax system is progressive. You pay a higher percentage on spans of your taxable income as that income increases.
  • Your effective tax rate is the average of all the percentages you pay on these spans of income.
  • Your marginal tax rate is the top percentage you pay on your highest dollar.
  • Your effective tax rate tells you the exact percentage of your overall taxable income that you give to the IRS. 
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2021."

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