Legal Definitions - effective tax rate

The effective tax rate is a mathematical figure used to calculate the amount of tax a person or business owes to the government. It is usually expressed as a percentage of the taxable income.

The average tax rate is the tax liability of a taxpayer divided by the amount of taxable income. It is also known as the effective tax rate. For example, if a person has a tax liability of $10,000 and a taxable income of $100,000, their average tax rate would be 10%.

The marginal tax rate is the rate applicable to the last dollar of income earned by the taxpayer. It is useful in calculating the tax effect of receiving additional income or claiming additional deductions. For example, if a person is in the 25% tax bracket and earns an additional $1,000, their marginal tax rate would be 25%.

These examples illustrate how the effective tax rate is calculated and how it differs from the marginal tax rate. The effective tax rate takes into account all of a person's taxable income, while the marginal tax rate only applies to the last dollar earned. Understanding these rates can help individuals and businesses plan their finances and make informed decisions about their taxes.