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Income Tax Basics
Effective Tax Rate
Your average tax rate across all income.
The effective rate is your total tax divided by your gross income:
Effective Rate = Total Tax ÷ Gross Income
Effective vs. Marginal
| Concept | Definition | Example ($100K income, single) |
|---|---|---|
| Marginal Rate | Tax on next dollar | 24% |
| Effective Rate | Average across all income | ~15% |
Because of the progressive bracket system, your effective rate is always lower than your marginal rate. The first dollars of income are taxed at 10%, then 12%, and so on.
When to Use Each
- Use marginal rate when evaluating: deductions, additional income, 401(k) contributions
- Use effective rate when evaluating: overall tax burden, comparing locations, total take-home pay
Sources
Related Terms
More in Income Tax Basics
Tax Brackets
Progressive rate tiers applied to taxable income.
Marginal Tax Rate
The tax rate on your next dollar of income.
Taxable Income
Income remaining after deductions, subject to tax.
Adjusted Gross Income (AGI)
Gross income minus above-the-line deductions.
Modified Adjusted Gross Income (MAGI)
AGI with certain deductions added back, used for eligibility tests.
Filing Status
Determines your bracket thresholds and standard deduction.
Marriage Penalty & Bonus
Tax impact of filing jointly vs. two singles.
Tax Cuts and Jobs Act (TCJA)
2017 law that lowered rates and doubled the standard deduction.