The effective tax rate is a blended rate applied to your client's taxable income after deductions and represents his or her average tax rate.

 
Did You Know?
The effective tax rate is more important for clients to consider than the marginal tax rate, which is the highest tax bracket applied to the last dollar earned.

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Key Takeaway

The effective tax rate provides a more realistic picture of a client's true tax burden.

How to Calculate the Effective Tax Rate

Select an area to learn more about how the effective tax rate is calculated.

For this example, we use a married couple filing jointly in 2023 with taxable income (total income less deductions) of $377,500.

1
FIRST

Calculate Total Taxable Income
2
SECOND

Determine Taxes Owed From Each Bracket
3
THIRD

Divide Income Tax Owed by Total Income
 

Bottom Line

The effective tax rate can be significantly lower than the rate associated with your clients' tax brackets and help clients withhold more accurately. In this example, 20.79% is significantly lower than the marginal tax rate of 32%.

Next Step

Use the effective tax rate to help clients adjust withholding accordingly and minimize tax surprises.

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Examples provided are for illustrative and informational purposes only and not intended to be reflective of results you can expect to achieve.

The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Tax laws are complex and subject to change. Investors should always consult their own legal or tax professionals for information concerning their individual situations.