What's the difference between my tax bracket and my effective tax rate? If I have future taxes withheld, what category should I use?

[CalCountry · Accepted solution]

Tax bracket is the percentage of tax applied to the "next dollar" of income.  For example, if you have $60K in taxable income, and you're in the 25% tax "bracket," then the next dollars of taxable income received will be taxed at 25%.  It is tricky to calculate tax impacts because additional (or less) income might be sufficient enough to push you into the next higher (or lower) "tax bracket."

"Effective tax rate" is your overall tax due as a percentage of some denominator.  There are several ways to calculate effective tax rate.  Such as ... total tax over taxable income, or net tax over gross income, etc. etc.  The important aspect of your effective tax rate is to be consistent year-to-year as to how it is calculated.  You can't use effective tax rate to calculate the impact of increasing or decreasing income, but if calculated consistently it is a good measure of your overall tax burden as it applies year to year.