Why it matters
The effective rate is the number a client feels. It explains why a raise does not take home as much as expected and why a deduction can be worth more to one client than another.
Example
A client has $100,000 of taxable income and $18,000 of federal income tax. The effective rate is 18 percent, even though part of the income was taxed at a higher marginal rate.
Related terms
Questions about Effective tax rate
Should the effective rate use taxable income or total income?
Both are used, and the denominator should be stated. Tax divided by taxable income gives a different number from tax divided by gross income, so compare the same measure.
Why is the effective rate lower than the marginal rate?
The progressive brackets tax the first dollars at lower rates. The effective rate averages all of those rates, while the marginal rate applies only to the last dollar.