Effective Tax Rate
Definition
Total tax paid as a percentage of total income, giving the average rate across all brackets. It is usually lower than the marginal rate because earlier income is taxed at lower rates.
Formula
Effective tax rate = Total tax ÷ Taxable income × 100
Related Terms in US Tax
Tax Credit vs Deduction
A deduction reduces taxable income, so its value depends on the tax rate; a credit reduces the tax bill directly, dollar for dollar. Credits are generally worth more than deductions of the same amount.
Form 1040
The main US individual income-tax return, on which taxpayers report income, claim deductions and credits, and calculate the tax owed or refund due for the year.
Form 1120
The US federal income-tax return filed by C corporations to report income, deductions and the corporate tax owed. S corporations instead file Form 1120-S.
Form W-9
The US form a business requests from a contractor or vendor to collect their taxpayer identification number and certification, so the business can correctly report payments on a 1099 and avoid backup withholding.
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