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IRS: Tax rate and effective tax rate explained

Many Americans have waited until the last minute to file their taxes with the IRS and are now faced with confusing terminology.

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One of the things that confuse people when they file their taxes are the differences between tax rates.

This means effective tax rates and marginal tax rates.

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Effective tax rate with the IRS explained

The percent of your income that an individual or corporation pays in taxes is an effective tax rate.

For an individual, it’s the average rate your earned income and unearned income are taxed.

Earned income could be wages, and unearned income could be stock dividends.

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A corporation’s effective tax rate is the rate it’s pre-tax profits are taxed.

This tax rate may be figured out using t he 1040 Form and dividing the number found on line 16 by the number on line 11(b).

Marginal tax rate with the IRS explained

Marginal tax rate is the rate imposed on someone’s last dollar of income, according to Marca.

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This is the tax rate you pay on an additional dollar of income.

This increases as income rises.

It’s known as progressive taxation and taxes people based on their earnings.

This protects low income workers.

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