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.
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.