The effective tax rate, also called the average tax rate, is the percentage of your total income that you actually pay in taxes. It reflects the overall tax burden, not just the rate on your last dollar of income.
How It’s Calculated
Effective tax rate = (Total taxes paid ÷ Total income) × 100. For example, if you earned $60,000 and paid $9,000 in taxes, your effective tax rate is 15%.
Why It Matters
- Big picture: Shows your actual tax burden compared to your income.
- Comparison: Helps compare tax burdens across different income levels or countries.
Final Thoughts
The effective tax rate gives a more realistic view of how much of your income goes to taxes overall. Together with the marginal rate, it provides a complete picture of your tax situation.