The IRS processes millions of tax returns each year. While each federal tax return is unique, there’s at least one metric they have in common—the effective tax rate.
The effective tax rate represents the share of income that a person or corporation pays after accounting for tax breaks such as credits, deductions and exemptions. Why does this matter? Because it accurately reflects the amount of federal taxes you pay, while your tax bracket may not.
Key takeaways
The effective tax rate is the average tax rate paid by a person or corporation. It’s shown as a percentage and represents the share of a person’s or corporation’s income that will go toward federal taxes.
To figure out their effective tax rate, individuals must know two numbers: their gross annual income and their tax liability for that year.
The effective tax rate and marginal tax rate are related but not the same.
The marginal tax rate refers to the taxation rate based on your income tax bracket. Marginal tax rates for 2023 range from 10% for taxpayers in the lowest tax bracket to 37% for taxpayers in the highest tax bracket.
But this rate doesn’t apply to all of your income. Portions of your income will be taxed at the corresponding tax rate. So, you’ll pay the lowest tax rate for the first dollar you earn—10% for the first $10,275 for single filers or $20,550 for married joint filers. Each dollar after will be taxed at the rate for its bracket, up to your last dollar in the highest bracket.
A taxpayer’s effective tax rate is usually lower than their marginal tax rate. In other words, someone in the 24% tax bracket typically doesn’t hand over 24% of their annual income to the IRS. Instead, their effective tax rate might be 18%, meaning they’re paying 18% of their taxable income to the federal government.
Every year, the IRS adjusts the marginal tax rates to account for inflation. A person’s marginal tax rate falls into one of seven brackets, based on their income.
The following table shows the 2023 marginal tax rates for single taxpayers and married taxpayers filing jointly.
| Marginal tax rate | Total income for single filers | Total income for married couples filing jointly |
|---|---|---|
| 10% | $10,275 or less | $20,550 or less |
| 12% | $10,276 to $41,775 | $20,551 to $83,550 |
| 22% | $41,776 to $89,075 | $83,551 to $178,150 |
| 24% | $89,076 to $170,050 | $178,151 to $340,100 |
| 32% | $170,051 to $215,950 | $340,101 to $431,900 |
| 35% | $215,951 to $539,900 | $431,901 to $647,850 |
| 37% | $539,901 or higher | $647,851 or higher |