What is the 'Effective Tax Rate'
The effective tax rate is the average rate at which an individual or corporation is taxed. The effective tax rate for individuals is the average rate at which their earned income is taxed. The effective tax rate for a corporation is the average rate at which its pretax profits are taxed. An individual's effective tax rate is calculated by dividing total tax expense (line 63 on your 1040 Form) by taxable income (line 22). For corporations, the effective tax rate is computed by dividing total tax expenses by the firm's earnings before taxes. The effective tax rate is the net rate a taxpayer pays if all forms of taxes are included and divided by taxable income.
BREAKING DOWN 'Effective Tax Rate'
The effective tax rate is often a more accurate representation of a taxpayer's tax liability than its marginal tax rate. Two companies that are in the same marginal tax bracket, for example, may end up with different effective tax rates depending on their earnings. This occurs particularly with a progressive, or tiered, tax system, where different levels of income are taxed at different rates. For example, the first $100,000 of income may be taxed at 10%, and income between $100,001 and $500,000 might be taxed at a rate of 15%. The corporation's income is taxed at the various levels, and to determine the effective (or average) tax rate, the total tax is divided by the total taxable income.

Tax Rate
The percentage at which an individual or corporation is taxed. ... 
Tax Base
The assessed value of a set of assets, investments or income ... 
Tax Bracket
The rate at which an individual is taxed. Tax brackets are set ... 
Net Of Tax
An accounting figure that has been adjusted for the effects of ... 
Progressive Tax
A tax that takes a larger percentage from the income of highincome ... 
Federal Tax Brackets
Income tax groupings specified by the Internal Revenue Service ...

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What is the difference between income tax and capital gains tax?
... Read Answer >> 
How does the marginal tax rate system work?
The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >> 
How are effective tax rates calculated from income statements?
Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >> 
Is the marginal tax rate a progressive tax?
Learn how the marginal tax rate is a progressive tax that takes a higher percentage of income tax from highincome earners ... Read Answer >> 
How can I lower my effective tax rate without lowering my income?
Discover how to reduce your effective tax rate without losing income by maximizing adjustments and deductions, earning taxfree ... Read Answer >> 
What's the difference between the marginal tax rate system and a flat tax?
Find out about the difference between marginal tax rates and flat taxes. Gain insights on both systems and the arguments ... Read Answer >>