Legal Definitions - average tax rate

The average tax rate represents the total percentage of an individual's or entity's taxable income that is paid in taxes. It is calculated by dividing the total amount of tax paid by the total taxable income. This rate provides a straightforward measure of the overall tax burden on a given amount of income, offering a general understanding of what portion of earnings is allocated to taxes.

• Example 1: Individual Income Tax

  Maria earns a taxable income of $60,000 from her job in a year. After calculating all her deductions and credits, her total federal and state income tax liability amounts to $9,600.

  To find her average tax rate, we divide her total tax paid by her total taxable income: $9,600 / $60,000 = 0.16 or 16%.

  This example illustrates that Maria's average tax rate is 16%, meaning that 16% of her total taxable income for the year was paid in income taxes.

• Example 2: Corporate Profit Tax

  A manufacturing company, "Global Innovations Inc.," reports a taxable profit of $1,500,000 for its fiscal year. Based on applicable tax laws, the company's total corporate income tax payment for that year is $375,000.

  The average tax rate for Global Innovations Inc. is calculated as: $375,000 / $1,500,000 = 0.25 or 25%.

  Here, the average tax rate of 25% shows that a quarter of Global Innovations Inc.'s taxable profits were paid as corporate income tax.

• Example 3: Household with Multiple Income Streams

  The Chen family has a combined taxable income of $150,000, which includes salaries from two jobs and some investment earnings. After all deductions, their total income tax bill for the year (federal and state combined) is $33,000.

  Their average tax rate is determined by dividing their total tax paid by their total taxable income: $33,000 / $150,000 = 0.22 or 22%.

  This scenario demonstrates that the Chen family's average tax rate is 22%, indicating that 22% of their combined taxable income was paid in income taxes.