Effective Tax Rate
Your effective tax rate is your total tax divided by your total income, the average rate you actually pay. It is lower than your marginal rate. The first dollars of income are taxed in lower brackets, which pulls the average down.
Where the marginal rate is the rate on your last dollar, the effective rate is the average across all of your income. You calculate it by dividing your total tax by your total income. Because a progressive system taxes your first dollars at 10 and 12 percent before any income reaches the higher brackets, your average rate always comes out below the top bracket you land in.
People often quote their marginal bracket when describing their taxes, but the effective rate is what really left their pocket. Someone in the 24 percent bracket might have an effective federal rate closer to 15 percent once the lower brackets and the standard deduction are counted. Our paycheck playbook shows both rates side by side so you can see the gap for your own income.
Used in these calculators
Guides that put this term to work
Related terms: Marginal Tax Rate , Standard Deduction
Last updated . Part of the FinExplained finance glossary .