Effective Tax Rate
Tax Glossary Term
Definition
Your effective tax rate is the average rate at which your income is actually taxed, calculated by dividing your total federal income tax by your total income. It is always lower than your marginal tax rate because the US uses a progressive tax system where only the income within each bracket is taxed at that bracket's rate. For example, a single filer earning $100,000 in 2026 might be in the 22.0% marginal bracket, but their effective rate is only about 13.4% because the first $12,400 is taxed at just 10.0%, the next portion at 12.0%, and so on. The effective rate gives you a more accurate picture of your actual tax burden than the marginal rate. Financial planners use the effective rate when comparing total tax loads across scenarios — for instance, comparing a W-2 employee's effective rate to a self-employed person's combined income and SE tax rate. You can calculate it different ways depending on what you include: some calculations use only federal income tax, while others include FICA, state tax, or all taxes combined. When people say 'I pay X% in taxes,' they are usually referring to their effective rate. Knowing your effective rate helps you evaluate whether tax-saving strategies (like maximizing retirement contributions or claiming OBBBA deductions) are making a meaningful dent in your overall tax burden.
Example
Taxable income (single): $100,000
Federal income tax: $13,372
Effective rate: $13,372 / $100,000 = 13.37%
(Even though the marginal bracket is 22.0%)