Tax Rate Definition, Effective Tax Rates, and Tax Brackets

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What Is a Tax Rate?

A tax rate is a percentage at which the income of an individual or corporation is taxed. The United States uses a progressive tax rate system imposed by the federal government and many states. The federal income tax brackets for 2024 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

With such a system, the tax rate charged increases as the amount of the person's or entity's taxable income increases. A progressive tax collects more money from taxpayers with higher incomes.

Key Takeaways

• A tax rate is a percentage at which the income of an individual or corporation is taxed.
• The U.S. imposes a progressive taxation on income, where the higher the income, the greater the percentage of tax that is levied.
• The U.S. applies its tax rates in marginal increments, so taxpayers may pay an effective tax rate lower than their top bracket rate.
• Tax rates are also applied as sales tax on goods and services or as capital gains tax on investments.
• Other nations charge a flat tax rate or a regressive tax rate.

Understanding Tax Rates

To help build and maintain a nation's infrastructure as well as to support social services, a government taxes its residents. The tax collected is used for the betterment of the nation, society, and all living in it. In the U.S. and other countries, a tax rate is applied to taxpayer income.

Whether earned from wages or salary, investment income such as dividends and interest, capital gains from investments, or profits made from selling goods or services, a percentage of earned and unearned income is remitted to the government.

For income tax, the tax rate is the percentage of an individual's taxable income or a corporation's earnings owed to state, federal, and, in some cases, municipal governments. The tax rate applied to an individual’s income depends on the marginal tax bracket. The marginal tax rate used by the U.S. government is indicative of its progressive tax system.

Current Tax Rates

For individuals, the dollar threshold for each tax rate is dependent upon the status of the filer, whether they are single, the head of a household, married filing separately, or married filing jointly. The marginal tax brackets for 2023 and 2024 are:

A single individual who earns $62,000 in 2023 will be taxed as follows: 10% on the first $11,000; 12% on the next $33,725 (the amount over $11,000 up to $44,725); then 22% on the remaining $17,275 (the amount over $44,725 up to $95,375), all of which equals $8,947.50.

Another individual who earns $160,000 will be taxed 10% on the first $11,000; 12% on the next $33,725; 22% on the next $50,650 (the amount over $44,725 up to $95,375); then 24% on the remaining $64,625 (the amount of income that falls between $95,375 and $182,100), all of which equals $31,800.

Following this example, the single taxpayer who falls in the third marginal tax bracket will pay less tax than the single taxpayer who falls in the fourth and higher bracket.

A marginal tax rate means that different portions of income are taxed at progressively higher rates.

Although these taxpayers fall in the third and fourth marginal brackets, they do not pay flat rates of 22% and 24%, respectively, on all of their income due to the nature of the marginal tax calculation.

If they did, the first individual would pay 22% x $62,000 = $13,640; the second would pay 24% x $160,000 = $38,400.

In total, individual A pays an effective rate of 14.4% ($8,947.50 ÷ $62,000), and the individual with the higher income pays a rate of 19.9% ($31,800 ÷ $160,000). These rates are called effective tax rates and represent the actual percentage at which the tax is levied for a tax year.

Sales and Capital Gains Tax Rates

Sales Tax Rates

When a consumer purchases certain goods and services from a retailer, a sales tax is applied to the sales price of the commodity at the point of sale. Since sales tax is governed by individual state governments, the sales tax rate will vary from state to state. In Georgia, the rate is 4%, while the tax rate in California is 7.25%.

Capital Gains Tax Rates

Income gained from investments is categorized as earnings, and tax rates on capital gains and dividends apply. When the value of an investment rises and the security is sold for a profit, the tax rate that the investor pays depends on how long they hold the asset.

The tax rate of a short-term investment held for one year or less is equal to the investor’s ordinary income tax. Individuals in the 22% marginal tax bracket will pay 22% on short-term capital gains.

The tax rate on profits from investments held longer than a year ranges from 0% to 20%.

For tax year 2023:

Individuals with such taxable income at or below $44,625 pay 0%. If they have income above $44,625 to $492,300, they pay 15%. Those individual investors with such income over $492,300 pay a 20% tax rate on capital gains.

Married individuals filing jointly and surviving spouses with such taxable income at or below $89,250 pay 0%. If they have income over $89,250 to $553,850, they pay 15%. Those married filing jointly investors with such income over $553,850 pay a 20% tax rate on capital gains.

Heads of households (HOH) with such taxable income at or below $59,750 pay 0%. If they have income over $59,750 to $523,050, they pay 15%. Those HOH investors with such income over $523,050 pay a 20% tax rate on capital gains.

Married individuals filing separately with such taxable income at or below $44,625 pay 0%. If they have income over $44,625 to $276,900, they pay 15%. Those married individuals filing separately with such income over $276,900 pay a 20% tax rate on capital gains.

For tax year 2024:

Individuals with such taxable income at or below $47,025 pay 0%. If they have income over $47,025 to $518,900, they pay 15%. Those individual investors with such income over $518,900 pay a 20% tax rate on capital gains.

Married individuals filing jointly and surviving spouses with such taxable income at or below $94,050 pay 0%. If they have income over $94,050 to $583,750, they pay 15%. Those married filing jointly investors with such income over $583,750 pay a 20% tax rate on capital gains.

Heads of households (HOH) with such taxable income at or below $63,000 pay 0%. If they have income over $63,000 to $551,350, they pay 15%. Those HOH investors with such income over $551,350 pay a 20% tax rate on capital gains.

Married individuals filing separately with such taxable income at or below $47,025 pay 0%. If they have income over $47,025 to $291,850, they pay 15%. Those married individuals filing separately with such income over $291,850 pay a 20% tax rate on capital gains.

Qualified dividends are subject to the same tax rate schedule for long-term capital gains. Non-qualified dividends have the same tax rates as short-term capital gains.

Tax Rates Abroad

Tax rates vary from country to country. Some countries implement a progressive tax system, while others use regressive or proportional tax rates. A regressive tax schedule is one in which the tax rate increases as the taxable amount decreases.

The proportional or flat tax rate system applies the same tax rates to all taxable amounts, regardless of income level. Bolivia and Greenland are examples of countries that have this system of taxes in place.

How Are Tax Rates Imposed?

A tax rate can apply to goods and services or income and is defined by a government. The rate is commonly expressed as a percentage of the value of what is being taxed.

What Is a Tax Bracket?

A tax bracket defines a range of incomes subject to an income tax rate. Tax brackets are part of a progressive tax, in which the level of tax rates progressively increases as an individual’s income grows. Low incomes fall into tax brackets with lower tax rates, while higher earners fall into brackets with higher rates.

What Is the Difference Between a Marginal Tax Rate and an Effective Tax Rate?

A marginal tax rate is the amount of tax that applies to each additional income level as defined by the tax brackets. In the U.S., taxpayers pay more in taxes as their income rises. A taxpayer’s effective tax rate is the single rate obtained by totaling the amounts owed as determined by the various, applicable tax brackets and then dividing that by total income.

The Bottom Line

A tax rate is a percentage at which the income of an individual or corporation is taxed. The U.S. imposes a progressive tax, where the higher the individual's income, the greater the percentage of tax is paid.

Tax rates are also applied as sales tax on goods and services or as capital gains tax on investments. Some nations may impose a progressive tax, while others may charge a flat tax rate or a regressive tax rate.

1. Internal Revenue Service. "Rev. Proc. 2023-34, Pages 5-7."
2. Internal Revenue Service. "Rev. Proc. 2022-38," Pages 5-8.
3. California Department of Tax and Fee Administration. "Know Your Sales and Use Tax Rate."
4. Georgia Department of Revenue. "Sales Tax Rates: General," "Download General Rate Chart - Effective January 1, 2024 through March 31, 2024."
5. Internal Revenue Service. "Topic No. 409: Capital Gains and Losses."
6. Internal Revenue Service. "Rev. Proc. 2022-38," Pages 8-9.
7. Internal Revenue Service. "Rev. Proc. 2023-34," Pages 7-8.
8. Internal Revenue Service. "Publication 550, Investment Income and Expenses."
9. Internal Revenue Service. "Topic No. 404 Dividends."

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Tax liability is the amount an individual, business, or other entity is required to pay to a federal, state, or local government.

A qualified higher education expense is a tax credit for the parents of students attending a college or other post-secondary institution.

A widow(er)'s exemption is one of several forms of state or federal tax relief available to a surviving spouse in the period following their spouse's death.

A filing extension is an exemption made for taxpayers who are unable to file their federal tax return by the regular due date.

Passive income is earnings from a rental property, limited partnership, or other enterprise in which a person is not actively involved.

A flow-through entity is a legal business entity that passes income to the owners and/or investors of the business. It's sometimes referred to as a disregarded entity.

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