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Effective Tax Rate Formula:
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The Effective Tax Rate (ETR) is the average rate at which an individual or corporation is taxed on earned income. It represents the percentage of income that is paid in taxes, providing a more accurate picture of tax burden than the marginal tax rate.
The calculator uses the Effective Tax Rate formula:
Where:
Explanation: The formula calculates what percentage of your total income was paid in taxes, giving you a clear picture of your actual tax burden.
Details: Understanding your effective tax rate helps in financial planning, comparing tax efficiency across different income levels, and making informed decisions about tax strategies and investments.
Tips: Enter your total tax paid in dollars and your total income in dollars. Both values must be positive numbers, with income greater than zero.
Q1: How is effective tax rate different from marginal tax rate?
A: Marginal tax rate is the rate applied to your last dollar of income, while effective tax rate is the average rate you pay on all your income.
Q2: What is a typical effective tax rate?
A: Effective tax rates vary widely based on income level, deductions, credits, and tax jurisdiction. In the US, most individuals have an effective tax rate between 10-30%.
Q3: Can my effective tax rate be higher than my marginal tax rate?
A: No, your effective tax rate will always be equal to or lower than your highest marginal tax rate.
Q4: Why is my effective tax rate important for financial planning?
A: Knowing your effective tax rate helps you estimate future tax liabilities, evaluate tax-saving strategies, and make more accurate financial projections.
Q5: Does this calculator work for both individuals and businesses?
A: Yes, the formula applies to both personal and corporate taxation, though the components of taxable income may differ.