What Is an Effective Tax Rate?

Quick Answer

Your effective tax rate is the average percentage of income you pay in taxes. Because the IRS uses marginal tax rates and tax brackets to calculate your federal income taxes, finding your effective tax rate requires a bit of additional math. Divide your total tax by your taxable income to estimate your effective tax rate.

Woman sitting at kitchen table calculating taxes.

Exactly what percentage of your income goes to taxes? Many people don't know—or would rather not think about it. While you may have a vague idea of how much gets withheld from your paycheck each pay period, you may not know your effective tax rate, which is the average percentage of your income you pay to the federal government. To learn more about effective tax rates and how to find yours, read on.

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What Is an Effective Tax Rate?

Your effective tax rate is the percentage of taxable income you pay to the federal government as income taxes. Here's how to calculate your effective tax rate using your most recent tax return: Find your total tax (line 24 on your Form 1040) and divide that number by your taxable income (line 15 on your 1040). For example, if you paid $5,500 in taxes on $45,000 of taxable income, your effective tax rate is 12.2%.

While it may be helpful to know how much of your income goes toward taxes, the IRS doesn't use effective tax rates to determine your tax bill. U.S. taxpayers pay federal income taxes based on a system of marginal tax rates and tax brackets that apply progressively higher tax rates as your income goes up. To visualize how this works, see the table below.

Federal Tax Brackets for 2022

Here are the federal tax brackets and marginal tax rates for the 2022 tax year. The federal government adjusts tax brackets periodically for inflation, and new tax brackets are already available for 2023.

2022 Federal Tax Brackets by Taxable Income
Tax Rate Unmarried Head of Household Married Filing Separately Married Filing Jointly
10% $0 - $10,275 $0 - $14,650 $0 - $10,275 $0 - $20,550
12% $10,276 - $41,775 $14,651 - $55,900 $10,276 - $41,775 $20,551 - $83,550
22% $41,776 - $89,075 $55,901 - $89,050 $41,776 - $89,075 $83,551 - $178,150
24% $89,076 - $170,050 $89,051 - $170,050 $89,076 - $170,050 $178,151 - $340,100
32% $170,051 - $215,950 $170,051 - $215,950 $170,051 - $215,950 $340,101 - $431,900
35% $215,951 - $539,900 $215,951 - $539,900 $215,951 - $323,925 $431,901 - $647,850
37% $539,901 or more $539,901 or more $323,926 or more $647,851 or more

Source: IRS

How do tax brackets work, exactly? Say you had taxable income of $70,000 in 2022. This is how marginal tax rates would apply based on the tax brackets shown above:

$10,275 × 10%=$1,028
$31,499 (or $41,775 - $10,276) × 12%=$3,780
$28,224 (or $70,000 - $41,776) × 22%=$6,209

In this example, your first $10,275 in income is taxed at 10%, your second $31,499 is taxed at 12%, and your final $28,224 is taxed at 22%. Your total tax bill would be $11,017.

How to Calculate Your Effective Tax Rate

Your effective tax rate is your total tax divided by your taxable income. In our example, your tax bill is $11,017 and your taxable income is $70,000. Your effective tax rate would be $11,017 divided by $70,000, or 15.7%.

Effective Tax Rate vs. Marginal Tax Rate

An effective tax rate is not the same thing as a marginal tax rate. Your marginal tax rate is the top tax rate you pay based on your total taxable income. For instance, $70,000 in taxable income puts you into the 22% tax bracket and gives you a marginal tax rate of 22%. When someone tells you they're in the 35% tax bracket, they're referring to their marginal tax rate (and possibly bragging about their income).

Use your marginal tax rate to estimate the net value of a raise or bonus. Knowing your marginal tax rate won't help you estimate your annual tax bill: Being in the 22% tax bracket does not mean you pay 22% of your income to taxes, since the first $41,775 you earn is taxed at 10% or 12%. However, your marginal tax rate can help you estimate how much a raise or bonus benefits you after taxes. Still using our sample income of $70,000, a $5,000 bonus would be taxed at 22%, meaning you should plan to set aside about $1,100 of your bonus money for taxes (if your employer doesn't do it for you).

Use your effective tax rate to better understand how much of your income goes to taxes. Your effective tax rate can help you estimate your annual tax bill. Taking the time to calculate your effective tax rate can give you a better read on how your income is allocated and help you create a budget based on real numbers.

The Bottom Line

You can complete your tax returns and, indeed, go through your entire life without knowing your effective tax rate. But doing this simple calculation can make you more savvy about your finances by giving you a clearer view on how much you can allocate for housing or loan payments, living expenses or savings. While you're thinking about your finances, you might also consider a quick check-up of your credit. See your credit report and score for free anytime from Experian.