Term of The Day: Effective Tax Rate

by Dual Income No Kids on March 16, 2009 · 0 comments

Hi All,

The income tax system is pretty complex. Most people are familiar with your tax bracket, but your effective tax rate is something different. Essentially your effective tax rate is what you actually owe after deductions. Its defined as the amount you paid in taxes by your taxable income.

So, lets say your pretax income is $32,000. But you can deduct $4,000 – leaving your taxable income at $28,000. Lest say that you end up paying $2,000 in taxes. Then, your taxable income would be $2,000/$28,000 or 7%.

There are many good resources available on-line for achieving a low effective tax rate. One place to start is the IRS or you can check out the tax prof blog. Be sure to take advantage of deductions, they can really help you build wealth due to less tax liability!

Happy deducting!

James

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