How to Calculate Effective Tax Rate
What is Effective Tax Rate?
Effective tax rate is total tax paid divided by total income, showing the true percentage of income paid as tax. It differs from marginal rate which applies only to the next dollar earned.
Formula
Effective rate = Total tax / Total income
Step-by-Step Guide
- 1Calculate tax owed based on tax brackets and income
- 2Divide total tax by total income
- 3Result is the actual average percentage rate
Worked Examples
Input
Income: $80k, Tax: $12k
Result
Effective rate: 15%
vs marginal rate applied to top bracket
Common Mistakes to Avoid
- ✕Confusing effective with marginal rate
- ✕Not accounting for all income sources
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