Average tax rate

What is the average tax rate?

The average tax rate is the real rate of taxes a person pays after taking into account all of the federal tax brackets. Income is taxed at a different rate as it moves into a higher bracket. Taxpayers pay less in lower income brackets, more in higher brackets. As they pass each income level, they are taxed at the next higher rate. So, the average tax rate equals total taxes divided by total taxable income.

Deeper definition

In the U.S., taxes are calculated according to the amount earned under the nation’s income tax brackets.

At each progressive tax bracket, a taxpayer pays at a higher rate. That means, a taxpayer’s average tax rate is less than the top rate he or she pays on that higher portion of income and higher than the effective tax rate on the person’s lower portion of income.

In 2017, the first $9,325 that a taxpayer earns will be taxed at a rate of 10 percent. That rate increases to 15 percent for income between $9,325 and $37,950. From there, the tax rate increases to 25 percent for income up to $91,000 and 28 percent for income up to $191,000. There are three additional tax brackets up to 39.6 percent for incomes over $418,400.

Calculating the average tax rate involves adding all of the taxes paid under each bracket and dividing it by total income.

To be sure, the average tax rate will always be lower than the marginal tax rate, or the amount of tax a person pays on his or her next dollar of income.

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Average tax rate example

Chris and Cathy have a total household income of $100,000 and paid $15,000 in taxes. That makes their household’s average tax rate 15 percent.

 

Other Taxes Terms

Adjustments to income

Adjustments to income can reduce the amount of tax owe. Bankrate explains.

Adoption taxpayer identification number (ATIN)

What is an adoption taxpayer identification number? An adoption taxpayer identification number (ATIN) is temporarily given to children who are in the process of being adopted when the adopting family doesn’t have or doesn’t know the child’s Social Security number. When the adopting parents file their tax returns and list an adopted child as a […]

Current year tax

Current year tax is the tax you owe for a designated year. Bankrate explains.

Dependent care credit

The dependent care credit is a tax credit for working taxpayers. Bankrate explains.

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