Effective Tax Rate

Effective Tax Rate

The Effective Tax Rate is the average rate at which an individual or corporation is taxed on their taxable income. It is calculated by dividing the total tax liability by the total taxable income.

For individuals, the Effective Tax Rate provides insight into the proportion of income paid in taxes, taking into account all applicable tax brackets and deductions. For example, if an individual has a taxable income of $100,000 and pays $20,000 in taxes, their effective tax rate is 20% ($20,000 / $100,000).

For corporations, the Effective Tax Rate can vary based on various factors, including deductions, credits, and the structure of the organization. For instance, if a corporation has a taxable income of $1,000,000 and pays $250,000 in taxes, their effective tax rate is 25% ($250,000 / $1,000,000).

The Effective Tax Rate is useful for comparing tax burdens across different entities or individuals and understanding the overall tax impact relative to income.