What Is Your Effective Tax Rate?

This article is provided for informational purposes only and is not to be construed as legal or tax advice. Consult with a professional financial or tax advisor before making tax decisions.

Taxes can feel complex and intimidating. Not only are the forms confusing, but even the terms used to describe taxes can make your head spin. 

You may have heard mention of your “effective tax rate.” But what is effective tax rate, really? And why is it important to understand? 

What is effective tax rate? 

The effective tax rate is the percentage of your taxable income that you pay in taxes. 

• If you earn $50,000 and pay $10,000 in taxes, your effective tax rate is 20% ($50,000 x 0.2) 

• If you earn $100,000 and pay $25,000 in taxes, your effective tax rate is 25% ($100,000 x 0.25) 

Essentially, effective tax is the average rate of tax that you pay on your taxable income. 

Effective tax rate vs. marginal tax rate

Federal income taxes in the United States are based on a progressive taxation system. 

This system uses tax brackets, which you can think of as “buckets.” Money earned in a lower tax “bucket” is taxed at a lower rate, while money in a higher “bucket” is taxed at a higher rate. 

• The marginal tax rate is the rate you pay on the last dollar of income you earn. Marginal tax rates only apply to the money that falls in that particular tax bracket. 

• The effective tax rate, on the other hand, is the average rate you pay on your overall taxable income. 

Your effective tax rate is generally substantially lower than your marginal tax rate. This is because the effective tax rate takes into account all the income that’s taxed at a lower tax bracket. For example, a single filer earning $50,000 per year would have a marginal tax rate of 22%, but their effective tax rate would be closer to 13%. 

Effective tax vs. flat tax

These two terms are often confused. 

Effective tax rate is an average rate, while a flat tax rate is simply a set rate that does not change. 

A “flat tax” system involves paying the same flat rate for all income, regardless of income level. For example, a country might have a 15% flat tax on all personal income, whether you earn $10,000 or $10 million. 

Federal taxes in the U.S. use a progressive/marginal tax system, rather than a flat tax. The majority of states also use a progressive tax system. 

How to calculate effective tax rate

If you know your total taxable income and the total amount of tax you owe, calculating your effective rate is simple: 

• Take the amount of tax you owed for a year and divide it by your taxable income for that year 

  • For example, if you earned $50,000 and paid/will owe $6,500 in taxes for the year, you would divide $6,500 by $50,000 to get 0.13 

• Multiply this number by 100 to get the percentage 

• 0.13 x 100 = 13% 

In this case, your effective tax rate is 13%. 

Calculating effective tax rate using tax brackets

If you don’t know your total tax owed, you can roughly calculate your effective tax rate using the tax brackets below. 

However, keep in mind that this simplified approach ignores many tax deductions and credits that can reduce your tax liability. 

For optimal results, it’s wise to use a tax calculator — or, better yet, work with a tax advisor for personalized help.

Tax brackets for single filers

Tax Rate - Taxable Income Bracket (annual income) - Tax Owed

10% - $0 to $10,275 - 10% of taxable income

12% - $10,275 to $41,775 - $1,027.50 + 12% of the amount of income over $10,275

22% - $41,775 to $89,075 - $4,807.50 + 22% of the amount of income over $41,775

24% - $89,076 to $170,050 - $15,213.50 + 24% of the amount of income over $89,075

32% - $170,051 to $215,950 - $34,647.50 + 32% of the amount of income over $170,050

35% - $215,951 to $539,900 - $49,335.50 + 35% of the amount over $215,950

37% - $539,901 or more - $162,718 + 37% of the amount over $539,900

Note: The table above covers marginal tax rates for single filers. See this page for details for married couples and heads of household.

With the above tax brackets in mind, let’s look at an example using an income level of $60,000. 

$60,000 falls in the 22% tax bracket, but this is the marginal rate, not the effective rate. This means that the individual will not pay 22% of their $60,000 income — they will pay substantially less:

• $1,027.50 on the first $10,275 of income (10% tax bracket)

• $3,780 on the next $31,500 of income (12% tax bracket)

• $4,009.50 on the next $18,225 of income (22% tax bracket)

Adding all these numbers up, we can see that the individual owes $8,817 total in federal income taxes. 

What is the effective tax rate in this case? We can find it by dividing $8,817 by $60,000 (0.147, rounded) and then multiplying this by 100 (0.147 x 100 = 14.7%). 

In this example, the effective tax rate is 14.7%. 

Why your effective tax rate is important

Now you can answer the question of what is effective tax rate — but why does this information really matter? 

Your effective tax rate gives you a bird’s-eye view of what you actually owe in taxes in a given year. It can help to simplify your thinking around what you currently pay and what you can expect to pay in the future.

Looking at your effective tax rate can also ease the anxiety of being bumped into a higher tax bracket. 

There is a misconception that if you enter a higher tax bracket, you’ll owe way more in taxes. The reality is, you only pay that higher rate on the portion of income that falls into that bracket. 

By looking at your effective tax rate, you can zoom out and get a more accurate picture of your overall tax liability. 

Learn more about taxes

Ready to learn more about income taxes? Check out these other useful federal tax resources:

• When to expect your tax refund

• Understanding taxable vs. non-taxable income

• When to file your taxes

• What happens if you file taxes late

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