Effective tax rate,
Definition of Effective tax rate:
The effective tax rate is the percent of their income that an individual or a corporation pays in taxes. The effective tax rate for individuals is the average rate at which their earned income, such as wages, and unearned income, such as stock dividends, are taxed. The effective tax rate for a corporation is the average rate at which its pre-tax profits are taxed, while the statutory tax rate is the legal percentage established by law.
An individual can calculate their effective tax rate by looking at their 1040 form and dividing the number on line 16, the "Total Tax," by the number on line 11(b), the "Taxable Income." For corporations, the effective tax rate is computed by dividing total tax expenses by the company's earnings before taxes.
Formula: (Income tax paid ÷ taxable income before tax) x 100.
How to use Effective tax rate in a sentence?
- For corporations, the effective corporate tax rate is the rate they pay on their pre-tax profits.
- Effective tax rate typically refers only to federal income tax, but it can be computed to reflect an individual's or a company's total tax burden.
- Effective tax rate represents the percentage of their taxable income that individuals pay in taxes.
Meaning of Effective tax rate & Effective tax rate Definition