What is gross income? How it works and why it’s important
A person’s gross income is used to determine how much they have to pay toward federal and state income taxes.
3 MIN READ
Jun. 2, 2021
What is the average tax rate?
The average tax rate is the percent of taxes divided by taxable income. Because of the U.S.’s progressive tax system, people pay different percentages of tax the higher their income gets. The average tax rate helps them figure out how much tax was paid overall.
Deeper definition
In the U.S., taxes are calculated according to the amount earned under each income tax bracket, which is called a progressive tax system. Taxpayers pay less in lower income brackets, more in higher brackets, which is called a marginal tax rate. Every dollar they earn above their current bracket is taxed at the next one.
The average tax rate equals total taxes divided by total taxable income. Calculating the average tax rate involves adding all of the taxes paid under each bracket and dividing it by total income. The average tax rate will always be lower than the marginal tax rate.
In 2017, the first $9,325 that a taxpayer earns will be taxed at a rate of 10 percent, and the highest is 39.6 percent, which applies to incomes over $418,400.
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Average tax rate example
Chris earned $70,000 in 2017. According to that year’s tax brackets, he paid 10 percent on the first $9,325, 15 percent on every dollar between $9,325 and $37,950, and 25 percent on every dollar between $37,950 and $70,000. He estimates his total tax liability at $13,238.75, which would make his average tax rate 18.9 percent before accounting for deductions that could lower his actual taxable income.
