Effective Tax Rate — Definition and What It Means for Your Income
The actual percentage of your total income paid in taxes, as opposed to your tax bracket.
Effective tax rate is your total tax paid divided by your total income, expressed as a percentage. It differs from your marginal tax rate (tax bracket) because the U.S. tax system is progressive — only income above each bracket threshold is taxed at that bracket's rate.
Why it matters
Many people overestimate their tax burden by confusing their tax bracket with their effective rate. Your effective rate is almost always lower than your top marginal bracket.
Example
Someone in the 22% tax bracket doesn't pay 22% on all their income — only on the portion within that bracket. Their effective rate, including FICA, might be closer to 18-20% of total income.
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Related terms
Effective Tax Rate — FAQ
What's the difference between effective and marginal tax rate?
Marginal rate is the rate on your last dollar earned (your tax bracket). Effective rate is your total tax divided by total income — always lower than your marginal rate in a progressive system.