Average tax rate

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.

Do you need a personal loan to help pay your taxes? Check out the rates at Bankrate.com

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.

Other Taxes Terms

Individual Taxpayer Identification Number (ITIN)

The Individual Taxpayer Identification Number (ITIN) is a tax term you should know.

Standard mileage rate

Standard mileage rate is an IRS term every taxpayer should know. Bankrate explains it.

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 […]

More From Bankrate