Your effective tax rate is figured by dividing your total income by your total tax paid. It is a measure of the tax you actually pay versus the income you earned. Your effective tax rate is different from your marginal tax rate – you can be in the 37% marginal tax bracket but have an effective tax rate around 20% depending on how you earn your income.
Example: you earn $10,000 in net rental income before factoring in depreciation and amortization. Depreciation and amortization total $8,000, so you have taxable income of $2,000. If your marginal tax rate is 37%, you’ll pay $740 in taxes on the $2,000 of taxable income. However, your effective tax rate on this income stream is only 7.4% You earned (in your pocket) $10,000 in net income, but only paid $740 in taxes.
