Your Effective Tax Rate

The plain answer

Your effective tax rate is an average. A common version divides total income tax by total income, although the exact denominator depends on what you are trying to measure.

Because tax brackets apply different rates to different layers of taxable income, your effective federal income tax rate is usually lower than your marginal rate.

How it actually works

First decide which question you want the rate to answer. Dividing federal income tax by taxable income shows the average rate on taxable income. Dividing it by gross income shows the tax as a share of income before deductions.

Be consistent when comparing years or households. A rate based on federal income tax is not the same as a rate that also includes payroll, state, local, property, or sales taxes.

An effective rate describes the whole result. A marginal bracket is better for estimating the tax effect of the next dollar earned or deducted.

An effective rate can look small while a deduction still fails to cover the cost of the purchase that created it. Do not spend a dollar to save thirty cents in taxes.

What this means for you

Use your effective rate to understand your overall income-tax burden and to make consistent comparisons. Use your marginal rate for smaller forward-looking decisions.

If your effective rate changes, look beyond the bracket rate. Income mix, filing status, deductions, credits, and one-time events can all affect the result.

Common mistakes

• Calling the highest bracket reached an effective tax rate.
• Comparing rates that use different definitions of income or tax.
• Including a refund as if it reduced the year’s actual tax by itself.
• Ignoring credits when calculating final income tax.
• Making an unnecessary purchase because the deduction sounds valuable.

Related pages

• How Taxes Actually Work
• Marginal Tax Rates Explained
• How Tax Brackets Work