| 2023 Federal Tax Brackets | |||||
|---|---|---|---|---|---|
| Single | Married Filing Separately | Married Filing Jointly | Surviving Spouse | Head of Household | |
| 10% | $0 to $11,000 | $0 to $11,000 | $0 to $22,000 | $0 to $22,000 | $0 to $15,700 |
| 12% | $11,000 to $44,725 | $11,000 to $44,725 | $22,000 to $89,450 | $22,000 to $89,450 | $15,700 to $59,850 |
| 22% | $44,725 to $95,375 | $44,725 to $95,375 | $89,450 to $190,750 | $89,450 to $190,750 | $59,850 to $95,350 |
| 24% | $95,375 to $182,100 | $95,375 to $182,100 | $190,750 to $364,200 | $190,750 to $364,200 | $95,350 to $182,100 |
| 32% | $182,100 to $231,250 | $182,100 to $231,250 | $364,200 to $462,500 | $364,200 to $462,500 | $182,100 to $231,250 |
| 35% | $231,250 to $578,125 | $231,250 to $346,875 | $462,500 to $693,750 | $462,500 to $693,750 | $231,250 to $578,100 |
| 37% | $578,125 or more | $346,875 or more | $693,750 or more | $693,750 or more | $578,100 or more |
Example of an Effective Tax Rate
Imagine, for example, a graduated tax system where income under $100,000 is taxed at 10%, income between $100,000 and $300,000 is taxed at 15%, and income over $300,000 is taxed at 25%. Now consider two individuals who both hit the upper tax bracket of 25%, although one had a taxable income of $500,000, while the other had a taxable income of $360,000.
Both individuals would pay 10% on their first $100,000 of income, or $10,000. Both would then pay 15% percent on their income between $100,000 and $300,000, or $30,000 (15% of $200,000).
Finally, both would also pay 25% on their earnings over the $300,000 threshold. For the individual with $360,000 in taxable income, that would come to $15,000 (25% of $60,000). But for the individual with $500,000 in taxable income, the tax would be $50,000 (25% of $200,000). Their total tax obligations would be $55,000 and $90,000, respectively.
While both individuals could say they're in the 25% bracket, the one with the higher income has an effective tax rate of 18% ($90,000 in tax divided by $500,000 in income), while the other's effective tax rate is 15.3% ($55,000 divided by $360,000).
How Do I Calculate My Effective Tax Rate?
You can easily calculate your effective tax rate as an individual taxpayer. Do this by dividing your total tax by your taxable income. To get the rate, multiply by 100. You can find your total tax on line 24 of Form 1040 and your taxable income on line 15 of the form.
What's the Difference Between the Effective and Marginal Tax Rate?
An effective tax rate is the average tax rate for an individual or corporate taxpayer. As such, it's the percentage of taxes owed from the taxpayer's annual income. A marginal tax rate, on the other hand, is the total amount of tax levied on different levels of income. This means that a taxpayer's tax rate gets higher as their income rises. Taxpayers are divided into tax brackets under marginal tax systems where the first level of income is charged a lower rate. Any income earned above that incurs a higher rate.
Which Is Lower: the Effective Tax Rate or the Marginal Tax Rate?
An individual's effective tax rate is lower than the marginal rate. That's because the marginal tax rate breaks up your income into different levels. The first level of income incurs a lower tax rate while higher levels of income are taxed at the highest rate. Any amounts that fall in between are charged taxes based on levels in between.
The Bottom Line
Your effective tax rate is the percentage of tax you owe on your taxable income. This is based on brackets set and maintained by the IRS. You can easily figure out your effective tax rate by dividing the total tax by your taxable income from Form 1040. For corporations, the effective tax rate is calculated by dividing the total tax by earnings before interest. If you're unsure about anything related to your taxes, make sure you consult a tax advisor or professional who can guide you in the right direction.
Correction—Nov. 3, 2022: A previous version of this article misstated that taxpayers can calculate their effective tax rate by dividing the figure found on line 16 of Form 1040 by the figure found on line 11b on Form 1040. The correct way to calculate your effective tax rate is by dividing the figure from line 24 or your total tax by the figure from line 15, which is your taxable income then multiplying that figure by 100.
