How do I Calculate my Effective Tax Rate?

What is an Effective Tax Rate?

The effective tax rate is the average tax rate paid by an individual or a corporation. The effective rate for individuals is the average rate at which their earned income and unearned income are taxed. Essentially, an effective tax rate represents the percentage of your taxable income that you would have to pay. An effective tax rate usually only refers to federal income tax but it can be computed to reflect an individual’s entire tax burden.  

>>Related: How Do I File My Taxes?

How do I calculate it?

An individual can calculate their effective tax rate by looking at your 1040 form and dividing the number on line 16 (Total Tax) by the number on line 11b (Taxable Income). For an individual, the effective tax rate is just the total tax divided by your taxable income. The effective tax rate does not take into consideration state and local income taxes, sales taxes, property taxes, or other types of taxes. To determine your overall effective tax rate you can add up your total tax burden and divide it by your taxable income. This is useful when comparing the effective tax of two different people or determining how much in taxes you would pay in a high-tax state versus a low-tax state. 

>>Related: How does taxation differ from state to state? 

How does the Effective Tax Rate Work?

The new tax rates per bracket as of 2020 are 10%, 12%, 22%, 32%, 35%, and 37%. However, you do not just pay 12% or 22% of your taxable income. Increments of your taxable income are taxed at different tax rates all the way up to your top percentage for your income tax bracket. For example, if your income was $50,000 in 2019, $9,700 will be taxed at 10%, income from $9,701 to $39,475 will be taxed at 12% and the rest will be taxed at 22%. This makes our income tax system generally progressive as there are higher rates of taxes the more income you make. 

>>Related: Tax Schedules and What They Mean

Takeaways

An Effect Tax Rate can be calculated by dividing line 16 by line 11b on your 1040 form. It works as a progressive tax, taxing the upper parts of your income at a higher rate so generally the more you make the more you are taxed.

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