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What Is an Effective Tax Rate?

Learn about effective tax rates in this Howcast finance video with expert Gregory McGraime.

Transcript

Your effective tax bracket is really important because it shows you what the net amount or percentage rate that you're paying in taxes. So let me just take a step back and give you a little context. Our tax system in this country is a graduated tax system, so you may be paying a little tax at the ten percent rate, and as you earn more money, than amounts above that might be taxed at the fifteen percent rate, all the way up to the highest tax brackets. Your effective tax bracket is really important because at the end of the day that's how much you get to keep. The two numbers most people want to know is their marginal tax bracket, what's the highest rate you're paying, and your effective tax bracket, what is that bottom line number at the end of the day after deductions, and after you account for the different accounts that you're paying. So I would encourage everyone to take out your tax return, or if you have an accountant do your taxes, take a look at it and see if you can ascertain what your marginal, and effective tax brackets are to help factor into your overall tax planning.

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