Effective Tax Rate: What Does It Mean?
Your effective tax rate is the average percentage of your total income that you actually pay in federal taxes, taking into account the progressive structure of the tax system. Unlike your marginal rate, which applies only to your highest bracket of income, your effective rate reflects what you pay across all brackets combined. For example, if you owe $10,000 in taxes on $60,000 of income, your effective tax rate is about 16.7%. This number gives you a more accurate picture of your overall tax burden and is useful for comparing tax situations year to year or with others. Your effective rate will always be lower than your marginal rate unless all of your income falls into a single bracket.
