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Your effective tax rate is the rate you actually pay on all of your taxable income. You find your annual effective rate by dividing the tax you paid in the year by your taxable income for the year.
Your effective rate will always be lower than your marginal tax rate, which is the rate you pay on the income that falls into the highest tax bracket you reach.
For example, if you file your federal tax return as a single taxpayer, had taxable income of $75,000, and paid $15,332 in federal income taxes, your federal marginal tax rate would be 28% but your effective rate would be 20.4%. That lower rate reflects the fact that you paid tax on portions of your income at the 10%, 15%, and 25% rates, as well as the final portion at 28%.Yahoo Finance - Cite This Source - This Definition
- Browse Related Terms: Effective tax rate, flat tax, Marginal tax rate, Private letter ruling, Progressive tax, Regressive tax, Tax bracket