# What is Effective Tax Rate ?

According to Untied  State of America   Income Tax  Rate there  is various tax slab rate on income earned during the relevant  year from 1 January to 31 Decembers  of every year. Effective Tax Rate is a average tax rate which ultimately  paid to Government by a taxpayers. Efective tax rate  for individuals is the average rate at which need to pay tax to a taxpayer on his total income earned  during the financial year. The effective rate for a corporate tax payer is also the average rate at  which its pre tax profit are taxed

while the statutory tax rate is the legal percentage established by law. Effective tax typically refers to federal income tax it do not include state taxes, local taxes, property taxes, sales taxes, but it can be computed to reflect an individual’s or a company’s total tax  paid during the relevant financial year.

Formula  for effective tax rate calculation is

For individual  = Total tax paid/ total income earned during the relevant financial year.

For Coporatation + Total Tax paid/ Total income earned before tax during the relevant financial year.

Example

Imagine if a graduated  tax system where income tax rate 10% upto \$1,20,000, 15% on income between \$ 120001 to \$3,20,000 and over  and above \$ 3,20,000 at the rate 25%. Now consider two  individuals Mr A &  Mr.B  who both hit the upper tax rate of 25% although  Mr.A had a taxable income of \$6,00,000 and the Mr. B had a taxable income of \$ 4,00,000

Both individual would pay on their fi 10% on their first \$ 1,20,000 of income, tax \$12,000 and second slab 15% both would pay their income between \$ 1,20,001 to \$ 3,20,000 tax \$ 30,000. Finally both  would pay at the rate 25%on their earnings over and above the  income \$3,20,000. The individual with income \$ 6,00,000

 Computation of effective tax rate Particulars Tax rate Mr. A Mr. B Total  taxable Income during the financial year 600,000 400000 First \$ 1,20,000 10% 12000 12000 Second  from \$1,20,001 to \$3,20,000 up to 15% 30000 30000 Third Over and above \$ 3,20,000 25% 70000 20000 Total tax Payable 112000 62000 Taxpaid/ total taxable income 11200/600000 62000/400000 Effective tax rate in percentage 18.67 15.5

Internal Revenue Services is a tax collection  and operation in United State of America.

You can visit on Official website of IRS

What is Effective Tax Rate ? According to Untied  State of America   Income Tax  Rate there  is various tax slab rate…