The effective tax rate is a roundabout way of saying “average tax rate”. It is the average tax rate you pay across all of the tax brackets that your income spans. Since it is an average, your effective tax rate will be significantly lower than the tax amount of your highest tax bracket. The tax rate of your highest tax bracket is also known as your marginal tax rate.
Your effective tax rate is composed of the average of your various tax rates in each increment of your income, after all the deductions that you are entitled to and claim during filing. There is a fairly simple equation that can be used to help determine your effective tax rate.
Finding Your Effective Tax Rate
Since your effective tax rate is an average comprised of the percentages for all tax brackets that the IRS uses to delineate income levels. This starts with the official tax brackets:
- 10% – Income up to $9,875 for single, and $19,750 for married filing jointly
- 12% – Income $9,876-$40,125 for single, and $19,751-$80,250 for married filing jointly
- 22% – Income $40,126-$85,525 for single, and $80,251-$171,050 for married filing jointly
- 24% – Income $85,526-$163,300 for single, and $171,051-$326,600 for married filing jointly
- 32% – Income $163,301-$207,350 for single, and $326,601-$414,700 for married filing jointly
- 35% – Income $207,351-$518,400 for single, and $414,701-$622,050 for married filing jointly
- 37% – Income above $518,400 for single, and above $622,050 for married filing jointly
You might think this is starting to get a little complicated, and you’re right. It’s going to get a little worse, but you’ll be ok.
A single earner making $60k won’t pay 22% across the full amount of their earnings. They will pay 10% on the first $9,875, the 12% on the portion up to $40,125, and finally 22% on the last $19,875. That means they pay less overall taxes, and that their effective tax rate will be much less than the 22% that only affects roughly the last third of their income.
The earner in our example would end up paying $8,991 on their $60k yearly salary. This works out to about $988 on the first portion taxed at 10%, $3,630 on the second portion taxed at 12%, and $4,373 on the past portion at 22%. Since $8,991 is 14.985% of 60,000, their effective tax rate would be 14.99%.
As you can see, the numbers and bracketing can get a little complicated, and it can be a bit tedious to go through each income bracket to figure out the tax amounts for each percentage. However, knowing how to calculate your effective tax rate is important information. It can even help you determine if you are leveraging itemized deductions effectively from year to year.