I did my and my dependent's returns. On the first Summary Page of each return, TT shows a summary section at the bottom of the page:
Adj Gross Income
Taxable Income
Total Payments/Credits
Payment Due or Amt to be Refunded
Effective Tax Rate
What is the 'Effective' Tax Rate? How is it calculated? Can it be calculated from what is shown on the TT Summary Page? Also, what is the 'Marginal Rate' It is not shown but is a term I hear mentioned?
FYI:
On my dependent's return, if I divide Total Tax by Adjusted Gross Income I get the 'Effective Rate' shown.
On my return (parent), that same math does not work. I get a higher rate.
If it matters:
I file: Married Jointly, my daughter is a FT student dependent.
My daughter is a dependent, had a little income and a bunch of unearned income from PA due to COVID.
I understand she must pay tax at my 'Marginal rate' or something.
Based on what she owes, the 'Marginal' rate is a lot higher then the 'Effective ' rate!
I never really thought about this before but would like to understand:
What is the 'Effective' Tax Rate?
How is it calculated?
Can it be calculated from what is shown on the TT 1st, Summary Page or is there more to it?
Also, what is the 'Marginal Rate'?
Educate me! Thanks!
The marginal tax rate is the highest tax bracket by which your income will be taxed.
Your “effective tax rate” is the average percentage of your taxable income that you owe in federal taxes. In order to calculate this rate, you simply divide your tax liability (what you owe) by your total taxable income.
Here is a TurboTax article about effective and marginal tax rates.