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Effective Tax Rate
Definition
The average tax rate you actually pay on your total income.
Explanation
Effective tax rate = Total Taxes Paid ÷ Gross Income. This rate is always lower than your marginal tax rate because of progressive brackets, deductions, and credits. It gives a realistic picture of your actual tax burden.
When people say 'I paid X% in taxes,' they're usually referring to their effective rate. Comparing effective rates across years helps track changes in your tax burden relative to income.
Example
You pay $8,000 in federal taxes on $50,000 gross income = 16% effective tax rate, even though your marginal tax rate is 22%.