How to Calculate Your Effective Tax Rate

Your effective tax rate is the single most important number for understanding how much of your income actually goes to federal taxes. Unlike your marginal bracket rate, which only applies to your highest dollars of income, the effective rate shows the true average percentage you pay across all brackets. Knowing this number helps you budget accurately, compare job offers, and evaluate tax strategies.

What Is the Effective Tax Rate?

The effective tax rate is the average rate at which your taxable income is taxed by the federal government. Because the U.S. uses a progressive tax system with seven brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%), different portions of your income are taxed at different rates. The effective rate blends all of these into a single percentage that represents your actual tax burden.

When someone says they are "in the 22% bracket," that describes their marginal rate, meaning only the income within that bracket range is taxed at 22%. Their effective rate might be closer to 13% or 14% because the first portions of income are taxed at 10% and 12%. The distinction matters for financial planning: your effective rate tells you how much tax you truly owe as a share of income, while your marginal rate tells you the tax cost of your next dollar earned.

The Effective Tax Rate Formula

The formula is straightforward:

You can also calculate it using gross income in the denominator instead of taxable income. This produces a lower number because gross income includes the standard or itemized deductions. Both approaches are valid, but using taxable income gives you a clearer picture of how the brackets affect your tax, while using gross income shows the overall share of your paycheck that goes to federal taxes.

On your Form 1040, total tax is found on line 24 and taxable income on line 15. Dividing line 24 by line 15 gives you the effective rate on taxable income.

Step-by-Step Calculation Example

Let's calculate the effective tax rate for a single filer earning $95,000 in gross income for the 2026 tax year.

Step 1: Determine taxable income. Subtract the 2026 standard deduction of $16,100 from gross income: $95,000 − $16,100 = $78,900 taxable income.

Step 2: Apply each bracket.

• 10% on the first $12,400 = $1,240
• 12% on $12,401 to $50,400 ($38,000) = $4,560
• 22% on $50,401 to $78,900 ($28,500) = $6,270

Step 3: Sum the taxes. $1,240 + $4,560 + $6,270 = $12,070 total federal tax.

Step 4: Calculate the effective rate. $12,070 / $78,900 = 15.3% (based on taxable income). Or $12,070 / $95,000 = 12.7% (based on gross income).

The marginal rate for this taxpayer is 22%, but the effective rate is just 15.3%. That gap of nearly 7 percentage points translates to thousands of dollars that stay in the taxpayer's pocket because of how progressive taxation works.

Why Your Effective Rate Is Lower Than Your Bracket

The math behind this gap is simple. Every dollar you earn is not taxed at the same rate. Your first $12,400 of taxable income (for 2026 single filers) is taxed at only 10%, regardless of whether you earn $30,000 or $300,000. Those low-rate dollars pull down the average, creating a buffer between the marginal and effective rates.

As income rises, the gap actually widens in absolute terms, though the effective rate slowly climbs. A single filer with $200,000 in taxable income is in the 32% bracket but pays an effective rate of about 20.5%. That nearly 12-point gap means roughly $24,000 in tax savings compared to a hypothetical flat-rate system at 32%.

This is precisely why the progressive system is designed the way it is: it shields lower income from higher rates while increasing the burden gradually as earnings grow.

Effective Tax Rate at Different Income Levels

The table below shows how the effective rate changes across income levels for single filers in 2026. Taxable income assumes the standard deduction of $16,100 has been subtracted.

Practical Examples

Example 1: Comparing Job Offers. Lisa receives two job offers: one paying $80,000 in Texas (no state income tax) and another paying $90,000 in California (state tax rate of about 6% at this income). Using the effective federal rate of roughly 12.4% on $80,000 versus 13.5% on $90,000, plus the California state tax, she calculates that the $80,000 Texas offer actually yields more take-home pay ($69,100 versus $68,900) once all taxes are considered. The effective rate comparison gave her clarity that the gross salary difference was misleading.

Example 2: Retirement Contribution Decision. Tom earns $130,000 and is considering contributing $24,500 to his traditional 401(k). His taxable income would drop from $113,900 to $89,400, moving his marginal rate from 24% to 22%. His effective rate drops from 17.6% to 14.6%, saving him roughly $5,400 in federal taxes. The contribution effectively costs him only $19,100 out of pocket after the tax savings.

Example 3: Side Hustle Impact. Priya earns $70,000 from her day job and $15,000 from freelance graphic design. She worries the side income will dramatically increase her taxes. Her effective rate on $70,000 alone is about 12.5%. Adding the side income raises her effective rate to roughly 14.0%. She pays an additional $3,300 in federal tax on the $15,000, an incremental rate of 22% (her marginal bracket). Understanding the effective rate helps her see that her total tax burden remains manageable.

How to Lower Your Effective Tax Rate

Every dollar of deductions or pre-tax contributions reduces your taxable income, which lowers your effective rate. Here are the most impactful strategies for 2026:

Maximize pre-tax retirement contributions. Contribute the full $24,500 to a 401(k) ($32,500 if age 50+, $35,750 if age 60-63). Each dollar contributed saves you tax at your marginal rate while lowering your effective rate.

Use Health Savings Accounts. If eligible, contribute up to $4,300 (individual) or $8,550 (family) to an HSA. This is a triple tax advantage: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

Claim all eligible credits. Tax credits directly reduce your tax bill, which has an outsized effect on the effective rate. The Child Tax Credit, Earned Income Tax Credit, Lifetime Learning Credit, and Saver's Credit are among the most common.

Consider Roth conversions strategically. In low-income years (sabbatical, early retirement, career transition), converting traditional IRA funds to Roth at a low effective rate locks in that low rate forever. The converted funds then grow and are withdrawn tax-free.

Effective Tax Rate vs Marginal Rate: When Each Matters

Use your effective rate when you want to know how much of your total income goes to taxes. This is the number that matters for budgeting, comparing take-home pay across jobs, and evaluating your overall tax burden year over year.

Use your marginal rate when making decisions at the margin: whether to take on extra work, whether a deduction is worth pursuing, or how much tax you will save from a specific contribution. A $1,000 deduction saves you $220 if your marginal rate is 22%, regardless of what your effective rate is.

Both numbers together give you a complete picture. The effective rate tells you where you are; the marginal rate tells you the cost or savings of your next financial move.

Last updated: February 23, 2026