Effective Tax Rate: Overview, Calculation, and How It Works

By Frank Bass – Updated Jun 10, 2025 at 1:22 PM EST | Fact-checked by Robin Hartill, CFP

Key Points

Effective tax rate is your average tax rate as a percentage of total income.
Marginal tax rate is the tax on your highest dollar earned, not your total income.
Historically, top marginal rates have been as high as 94%, but effective rates have been much lower.

It’s a simple difference, but a big distinction: There are tax brackets, and then there’s your tax bill.

The United States has a progressive federal income tax system that's based on brackets, also known as marginal rates. Your marginal rate -- your top tax bracket -- will likely be considerably more than your effective rate. Here, we’ll explain the difference and the history of marginal and effective tax rates and provide an example of how it works.

Loading paragraph...

A bar graph on a chalkboard showing taxes are increasing. — Image source: Getty Images.

Loading image...

Loading paragraph...

The top tax rate fluctuated over the next few decades. It soared to 77% to pay for World War I before falling to as little as 25% on the eve of the Great Depression. It rose sharply during World War II, climbing to a record of 94% in 1944-45 and staying in the 90% range through 1963.

Marginal rates plummeted to 28% from 1988 until 2000 before creeping back up. Though marginal tax rates climbed as high as 39.6%, since 2018, the highest tax bracket has been 37%.

An analysis by Fidelity, however, found much less movement in the average effective tax rate for U.S. households. In 2001, the typical American household handed over 14.47% of its taxable income to the IRS; by 2021, the figure had climbed to 14.9%, the highest rate in two decades. Over the 20-year period, it ranged from a low of 11.39% in the midst of the Great Recession in 2009 to the 2021 high.

Loading paragraph...

Related investing topics

Loading paragraph...

Understanding Taxation of Your Retirement Income

Just because you're retired doesn't mean you're living tax-free.

How to Calculate Tax on W-9 Income

Form W-9 doesn't usually result in income taxes withheld, but there is an exception.

Property Taxes in Each State

Property tax rates affect real estate investors and homeowners. Here's what you need to know.

Loading hub_pages...

Loading paragraph...

2025 Federal Income Tax Brackets (Source: Tax Foundation)

Loading table...

To calculate your effective tax rate, you'd divide your total tax bill ($11,828) by your taxable income ($100,000) for a figure of about 11.8% -- significantly lower than your marginal tax rate of 22%.

Loading paragraph...

About the Author

Frank Bass is a contributing Motley Fool stock market analyst and editor covering energy, healthcare, consumer, and financial sectors. Frank has decades of experience in financial journalism, holding reporting and editing roles at The Wall Street Journal, The Associated Press, and Bloomberg. He also currently edits research on the global energy transition. He holds a bachelor’s degree in journalism from Texas Tech University and is a graduate student at the University of Alaska Fairbanks. Fun Facts: Frank has hiked The Long Trail in Vermont from end to end, and currently lives in a semi-dry cabin in Interior Alaska.

TMFEditFool

The Motley Fool has a disclosure policy.