What is effective tax rate

[12trent34]

last year 0.00% this year 5.35% why

[DanielV01 · Accepted solution]

It depends.  Your effective tax rate is based on how much income tax liability you have on your reportable income.  Last year, you had a tax liability of zero, and undoubtedly had less income than what you had this past year.  This past year, you did have a tax liability.  A 5.35% effective tax rate means that if you are reporting 20,000 (this is an example), your tax liability is $1070, or 5.35% of your reported income.  (To know the exact amount, you will have to divide your tax, which is located on line 10 of Form 1040EZ or line 28 of Form 1040A, depending on which form you file, with your AGI, line 4 of 1040EZ or line 21 of Form 1040A).  That percentage should be 5.35%

[ltg]

When you say “20,000”, is that Gross Income, Total Income, AGI, or Taxable income?

[tk94110]

I am reading my Tax History Report that TT generates. In there, there is a year where the effective tax rate is negative despite that there was tax liability of thousands. How can a negative effective tax rate happen ?

In other years, the AGI multiplied by the effective tax rate does not match with the net tax payment (tax - tax credits + other taxes).

[Skye4]

Why is my rate for 2020 and 2021 at 10% when it was only 5.99% in 2019?

[MarilynG]

An individual can calculate their effective tax rate by looking at their Form 1040 and dividing the number on line 16, the "Total Tax," by the number on line 11(b), the "Taxable Income." 

The more you earn, the higher your marginal tax rate. The lowest tier of income is taxed at a low rate. The next higher tier of income is taxed at a slightly higher rate. At each step of income, the tax rate becomes higher.  

Click this link for more info on Tax Brackets so you can compare your 2020 and 2021 returns.