What is Effective tax rate?

Your effective tax rate is the average rate you actually pay on your total income—usually much lower than your marginal rate. Unlike the marginal tax rate, which is the rate paid on the last dollar of income, the effective tax rate provides a realistic measure of a taxpayer's overall tax burden. It is calculated by dividing the total federal income tax liability by the taxpayer's total income (either gross income, adjusted gross income, or taxable income).

Because the U.S. tax system is progressive, a taxpayer's effective tax rate is almost always lower than their marginal tax rate. For instance, a taxpayer whose top dollar is taxed at a marginal rate of 24% pays lower rates (10%, 12%, and 22%) on the lower segments of their income, resulting in an average or effective tax rate that is significantly lower than 24%.

Calculating the effective tax rate helps individuals compare their actual tax burden across different tax years and evaluate their tax planning efficiency. It is also used by policy analysts to assess the fairness and progressivity of tax codes across different income levels.