Effective tax rate
Also called: average tax rate
Effective tax rate is your total tax divided by an income amount, shown as a percentage. Because the same tax can be divided by taxable income or by total income before deductions, the rate means little until you name which income you used.
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How it works
To calculate it, divide your federal income tax for the year, after credits, by an income figure and multiply by 100. Because brackets apply in layers, part of your income is usually taxed below your top rate, so the effective rate typically sits under your marginal rate. The figure normally covers federal income tax only; payroll and state taxes stay out unless you add them and say so.
The denominator changes the answer. Measured against taxable income, the rate shows how the brackets worked out. Measured against total income before deductions, it also reflects the standard deduction or itemized deductions, so it comes out lower. Both versions are valid, but two effective rates can only be compared fairly when they use the same income measure, the same tax figure and the same tax year.
Because the effective rate averages the whole year, it is not the right tool for pricing a raise or a new deduction; extra income is taxed at your marginal rate. In the example below, applying 10.4% to a $5,000 raise would suggest $520 of federal income tax, but those dollars fall in the 22% bracket and add $5,000 × 22% = $1,100.
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Sources and further reading
Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.