The percentage of your total taxable income that goes toward paying taxes is the percentage known as your effective tax rate. In most cases, it’s a significant amount lower than your marginal tax rate, which is the highest tax band you fall into.

## What Does It Mean to Have an Effective Tax Rate?

Your effective tax rate is calculated by taking the average of all of the tax brackets that are applicable to your income level according to the IRS. Before you can figure out what your effective tax rate is, you need to know how the IRS sets up tax brackets.

If you are a single taxpayer in the year 2021 and earn $60,000, you will be in the tax bracket that has a marginal rate of 22 percent; nevertheless, the amount of tax that you pay won’t be equal to 22 percent of your total income. You’d be responsible for paying tax on your excess earnings, which would amount to $19,475, or any sum that’s more than $40,525.

The following graphic provides an overview of the effective tax rate for single people for the 2021 tax year, which corresponds to the tax return that will be filed in 2022.

## The Workings Behind the Effective Tax Rate

To get your effective tax rate, you would take your income and divide it by the total amount of taxes that you paid. The fact that two individuals who are in the same tax band might have different effective tax rates is what makes the concept of effective tax complex concept.

One illustration is as follows: Someone earning $80,000 per year would owe taxes at the rate of 22 percent on $39,475 of their income in 2021, which is the amount greater than $40,525.you made $60,000 in taxable income, the portion of your income that was subject to taxation would be reduced to $19,475 at a rate of 22 percent. Both of you would be subject to the maximum legal tax, which is now set at 22 percent. Both of you would be subject to the same level of taxation.

- On an income of $60,000, you would be responsible for paying taxes totaling $8,991:
- On the first $9,950, there will be a 10% charge of $995.
- At a rate of 12%, $3,669 is owed on $9,951 and up to $40,525.
- $4,285 based on a $40,526 loan up to $60,000 at a 22% interest rate
- A person with a taxable income of $80,000 would be required to pay the following amount of tax:
- On the first $9,950, there will be a 10% charge of $995.
- At a rate of 12%, $3,669 is owed on $9,951 and up to $40,525.
- $8,684 based on $40,526 up to $80,000 at a 22% discount rate

It works out to a 14.98 percent effective tax rate for you. The rate that would apply to the second individual is 16.73 percent. The effective tax rate that applies to the second taxpayer is greater. They made $20,000 more than you did, and as a result, they were responsible for paying a higher amount of tax.

Your effective tax rate does not take into account any taxes that may be owed to your state, nor does it take into account any taxes that are owed on sales of property. Only the amount of income tax that is owed to the federal government will count toward this total.

If you’re thinking about making a big change in your life, like getting married or retiring, it’s helpful to know your effective tax rate so you can plan for taxes and your budget better.

## Comparison of the Effective Tax Rate and the Marginal Tax Rate

The tax system in the United States is considered to be “progressive.” It eliminates the use of a single tax rate in favor of many marginal tax rates. The more your income, the higher the percentage of tax you’ll have to pay on your excess cash.

When you have a taxable total income of $60,000, your marginal tax rate is 22%.The marginal tax rate is only applied to the portion of your income that is in excess of a specified threshold amount determined by the tax bracket system. The effective tax rate that you pay is the average rate that you pay on all $60,000 of your income. It provides a much clearer idea of the actual amount of tax burden you have.

## How to Determine What Your Actual Tax Rate Is

Take a look at the completed tax return for the year 2021. On line 24 of your 2021 Form 1040, you will need to enter the entire amount of tax that you owe. Now, divide the total that is shown on line 24 by the information that is found on line 15. (taxable income). Your effective tax rate will be determined based on the results of this computation.

Form 1040 has been revised three times by the Internal Revenue Service (IRS), once for the 2018 tax year, once again for the 2019 tax year, and once again for the 2020 tax year. After that, the 2021 form went through a few rounds of editorial polishing. On the return for 2019, the amount of taxes you owe appears on a different line than it does on the form for 2021.

## Do You Make Tax Payments on Your Take-Home Pay at the Effective Tax Rate?

What you make throughout the tax year will not be subject to the tax rate that you actually end up paying to the government. Your taxable income is the amount that is subject to taxation; this number is determined by taking your gross income and deducting any deductions, whether they are standard or itemized, as well as any adjustments that are made above the line.

If your gross income for 2021 was $60,000 and you used the standard deduction for a single taxpayer of $12,550, your taxable income would be $47,450. This is assuming that you do not qualify for any further tax benefits whatsoever, in which case your taxable income would be $47,450. After you take out all of the tax credits and deductions that you are eligible for, the rest of your income will be taxed.

## Key Takeaways

- The structure of the federal tax system is one that is progressive. As the total amount of your taxable income grows, the proportion of that income that is subject to taxation also grows.
- Your effective tax rate is the total of all the different tax percentages that you must deduct or pay on each of these types of earnings.
- Your marginal tax rate is the highest amount of tax you have to pay on your highest possible amount of money.
- Your effective tax rate shows how much of your total taxable income you have to give to the Internal Revenue Service.