Effective tax rate: the formula and what it tells you

What an effective tax rate is

An effective tax rate is your total tax expressed as a percentage of your income. It answers a simple question: out of every dollar you earned, how many cents went to tax? It is a single blended number, unlike the bracket rate, which only applies to a slice of income.

The gap between the two exists because federal income tax is progressive. The first $12,400 of a single filer's 2026 taxable income is taxed at 10%, the next slice at 12%, and so on through seven rates set out in IRS Rev. Proc. 2025-32. The marginal tax rate is the rate on your last dollar. The effective rate averages all the layers together.

The effective tax rate formula

The effective tax rate formula has one line: effective tax rate = total tax / income x 100. The calculation is easy. The judgment calls are which tax you put on top and which income you put underneath.

1. Find your total federal income tax after credits. On a filed return, this is the total tax line on Form 1040, not the refund or balance due.
2. Pick the income figure you want to measure against: gross income, adjusted gross income or taxable income (see the section on which figure to use below).
3. Divide tax by income and multiply by 100.
4. If you want a full picture, repeat the math with Social Security, Medicare and state income tax added to the top line.

Effective tax rate by income: four worked examples for 2026

The examples below use 2026 single filer brackets and the $16,100 standard deduction. Each person has only wage income, no pre-tax deductions and no credits. Effective rate is federal income tax divided by gross wages.

How the $75,000 example works

Taxable income is $75,000 minus $16,100, or $58,900. The first $50,400 costs $5,800 under the 2026 rate schedule. The remaining $8,500 is taxed at 22%, adding $1,870. Total tax is $7,670, and $7,670 divided by $75,000 is 10.2%.

Notice that even the $300,000 earner, whose last dollars fall in the 35% bracket, pays under 23% overall. The same layering applies to every filing status. You can run your own numbers with the tax bracket calculator.

Why is my effective rate lower than my bracket?

Two things pull it down. First, the standard deduction or itemized deductions remove part of your income from tax entirely, so some of your earnings are taxed at 0%. Second, only the dollars above each threshold get the higher rate, so most of your income is taxed at 10% and 12% even when your top bracket is 24%.

Credits push it lower still. A $2,200 Child Tax Credit for 2026 comes straight off the tax bill. Applied to the $7,670 in the example, one child would cut the tax to $5,470, about 7.3% of $75,000. A parent living with that child would often also meet the head of household requirements, which lowers the tax again. If you are not sure which bracket applies to you, start with what tax bracket am I in.

Effective vs marginal tax rate: when to use each

Use the marginal rate for decisions at the edge: how much of a raise you keep, how much a traditional 401(k) contribution saves, or what an extra freelance job costs in tax. Use the effective rate to compare your overall burden year to year, to budget, or to compare yourself with another household.

Which income figure should you divide by?

There is no single official definition, so the answer changes the result. Using the $75,000 example, the same $7,670 tax gives three different rates:

• Gross income ($75,000): 10.2%. Best for comparing with your salary and for household budgets.
• Adjusted gross income: the same $75,000 here, but lower if you have deductions such as student loan interest or HSA contributions.
• Taxable income ($58,900): 13.0%. Useful for checking your math against the rate schedule, less useful for comparing people.

Whichever you choose, use the same one every year so the trend means something. Pre-tax 401(k) contributions shrink the wages reported on your W-2, so dividing by W-2 wages will overstate your rate slightly compared with dividing by total pay.

Does effective tax rate include state and payroll tax?

Only if you add them. Most quick calculations, including the table above, cover federal income tax alone. Employees also pay 6.2% Social Security tax and 1.45% Medicare tax on wages, per IRS Topic 751.

Adding payroll tax to the $75,000 example puts $5,737.50 more on top, for $13,407.50 in total federal tax and an all-in federal effective rate of 17.9%. State income tax would raise it further, unless you live in one of the states with no income tax.

What is a good effective tax rate?

There is no official target. A lower effective rate is not automatically better if it comes from lower income. The useful question is whether you are paying more than you need to, and the levers are the same ones that set taxable income: filing status, deductions, pre-tax retirement contributions and credits.

To see how every bracket threshold has moved in recent years, compare the tables in our federal tax brackets by year guide.