tax
Effective Tax Rate
Your effective tax rate is your total tax paid divided by your total income, expressed as a percentage. It is always lower than your marginal rate in a progressive tax system.
Formula
Effective Rate = (Total Tax ÷ Gross Income) × 100 Effective Rate = Total Tax ÷ Gross Income × 100. Because income is taxed progressively, most of your income is taxed at rates well below your marginal rate.
A US single filer earning $80,000 might have a marginal rate of 22% but an effective federal rate of around 13%. Once FICA taxes are added, total effective rate rises to roughly 21%.
Effective tax rate is the most useful number for budgeting: it tells you what fraction of your gross income actually goes to the government.
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- Marginal Tax Rate
- Your marginal tax rate is the rate you pay on the last dollar of income earned — the rate of the highest tax bracket you fall into. It is not the rate applied to your entire income.
- Tax Bracket
- A tax bracket is a range of income taxed at a specific rate in a progressive tax system. Each bracket rate applies only to the income within that range, not to your entire income.
- Net Income (Take-Home Pay)
- Net income is your earnings after all taxes and deductions have been removed. It is the amount that actually lands in your bank account — also called take-home pay.
Frequently asked questions
What is Effective Tax Rate?
Your effective tax rate is your total tax paid divided by your total income, expressed as a percentage. It is always lower than your marginal rate in a progressive tax system.
What is the Effective Tax Rate formula?
The formula is: Effective Rate = (Total Tax ÷ Gross Income) × 100