What Is an Effective Tax Rate?

A taxpayer calculates his effective tax rate at home table with papers in hand

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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.

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.

How the Effective Tax Rate Works

Your effective tax rate is the average of the taxes you owe divided by your taxable income. Another way to say it is that your effective tax rate is the average of all the tax brackets the IRS uses for your income. 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 2022 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: $18,225, or the portion over $41,775.

The chart below shows the effective tax rate by income for single individuals for the 2022 tax year, which is the tax return you’ll file in 2023.

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

An Example of Effective Tax Rate

Here’s an example. If your gross income is $80,000 in 2022, you would pay the 22% rate on $38,225 of your income in 2022. If you earned $60,000 in gross income, you would pay 22% rate on only $18,225 of your income. In both cases, part of your income would be taxed at 22%, but your effective tax rates would be different.

When your taxable income is $80,000, your effective tax rate is 13.23%, while the rate is 10.31% when your taxable income is $60,000. What makes the tax rates so different? You earned considerably more money in the 22% tax bracket, which pushed your effective tax rate higher.


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.

How To Calculate Your Effective Tax Rate

Look at your completed 2022 tax return. Identify the total tax you owed on Form 1040, then divide it by the taxable income you listed on your 1040. The result of this calculation is your effective tax rate.

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 higher 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.

So, if you earned a taxable income of $60,000 in 2022, your effective tax rate would be 10.31%, while your marginal tax rate would be 22%.

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 deductions, including above-the-line deductions, from your gross income.

Your taxable income would be $47,050 if your gross income for 2022 was $60,000 and you took the $12,950 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 you’re eligible to claim.

Frequently Asked Questions (FAQs)

What's the difference between effective tax rate and marginal tax rate?

Your effective tax rate is the average tax rate you paid on your taxable income, while your marginal tax rate is the rate you pay on the "last dollar of your income."

How do you calculate your annual effective tax rate?

The simplest way to do this calculation is to divide your total taxes by your taxable income.

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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 2022."

  2. IRS. "26 CFR 601.602: Tax Forms and Instructions." Page 6.

  3. Center on Budget and Policy Priorities. "Policy Basics: Marginal and Average Tax Rates."

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