effective tax rate

The effective tax rate is the average percentage of your total income that you pay in taxes. Unlike nominal tax rates, which apply to specific income brackets, the effective rate considers all your income and deductions, providing a clearer picture of your overall tax burden. For example, if you earn $100,000 and pay $20,000 in taxes, your effective tax rate is 20%. It helps individuals and businesses understand their tax obligations relative to their income, allowing for better financial planning.