The Average Tax Rate Definition

The average tax rate in the United States varies depending on the amount of income to which it's applied. An average tax rate as it applies to income tax may be defined as the percentage of income owed as taxes or, as Fair Tax defines the term, as the ratio of taxes paid to taxable income. In mathematical terms, divide the total tax liability by total taxable income to get the average tax rate.

Average Federal Tax Rates

In computing federal tax rates, the average tax rate can't be determined by using tax brackets based on gross income. The federal government allows either a standard or itemized deduction amount to be subtracted from gross income. In addition, a personal exemption for the taxpayer plus one exemption for each claimed dependent may be deducted from adjusted gross income prior to figuring taxable income. Therefore, in considering the average tax rate for filers with less than $100,000 in taxable income, a number of variables must be considered.

Example of Single-Filer Tax Rates

Filing status of a federal taxpayer has an immediate impact on the tax rate applied to taxable income. Consider a taxpayer, whose filing status is "Single," with a taxable income of $50,000. Per the 2010 Tax Table, the tax liability would have been $8,675, for an average tax rate of 17.35 percent. However, the taxpayer is permitted to claim a deduction on the income prior to figuring taxes. Suppose the taxpayer claimed the standard deduction of $5,700 in 2010 --- this immediately reduces taxable income to $44,300. Next, the taxpayer may claim one exemption of $3,650, reducing taxable income further to $40,650. Now taxes owed equals $6,350, for an average tax rate of 12.7 percent.

Example of Married Tax Rates

The average tax rate a married taxpayer with dependent children would pay on the same amount of gross income is significantly lower. If the taxpayer completes an income tax return under the status of "Married Filing Jointly," the tax liability immediately decreases to $6,659 as opposed to $8,675 for single filers based on the same $50,000 figure. If the standard deduction is taken, as well as two exemptions --- one for each of the two spouses filing jointly --- taxable income would be reduced to $31,300, which is calculated by starting with $50,000 in taxable income minus the $11,400 standard deduction for married filing jointly, minus $7,300 for exemptions. The average tax rate in this case would be 12.34 percent, because the tax liability for a married couple filing jointly on $31,300 of taxable income is $3,861.

Simple Mathematics

Although the average tax rates for both a single taxpayer and married taxpayers who file joint returns are roughly equal in these examples --- 12.7 percent and 12.34 percent --- the difference in actual dollars paid for federal tax obligations results from the reductions in gross income prior to taxation. If no deductions or exemptions were allowed, defining the average tax rate works with simple mathematics. An individual simply divides taxes owed by income. For example, if a taxpayer earns $50,000 in taxable income and pays $6,000 in taxes, the tax rate would be 12 percent, because the tax liability of $6,000 divided by taxable income of $50,000 equals 0.12, or 12 percent, the individual's average tax rate.



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