What Is a Tax Rate?

Tax Rates Explained in Less Than 4 Minutes

Woman holds up and examines blue dress in a shop
Photo:

Reza Estakhrian / Getty Images

Definition

A tax rate is a level at which a government imposes taxes, generally expressed as a percentage of the value of what’s being taxed.

Key Takeaways

  • A tax rate is a percentage at which something is taxed.
  • Tax rates can apply to your income, property, and purchases of goods and services.
  • Federal income tax rates are progressive, meaning they get higher as your income rises.

How Tax Rates Work

A tax rate, generally expressed as a percentage, is the level at which a government imposes taxes. You might pay taxes based on a tax rate that is applied to your income or the cost of an item you purchase.

Note

An income tax rate is a percentage you owe in taxes based on your income. If you earn $100,000, you would pay an effective federal tax rate of roughly 18% based on your income tax brackets for 2022. This means you would owe around $18,000. (The actual income tax rate depends on a variety of factors, such as your filing status and the deductions you take.)

So rather than paying a fixed dollar amount, you pay a percentage of your income in taxes, and that percentage is your tax rate.

A tax rate can apply to many other areas of taxation, such as sales tax on goods and services you buy and property tax on real estate you own, in which you would also pay a percentage of the taxable value.

For example, if you buy a TV in New York City for $400, you would pay a sales tax rate of 8.875%, which would equal $35.50. Yet if you made the same purchase in New Jersey, you would pay a sales tax rate of 6.625%, which would equal $26.50 in sales tax.

Note

A property tax rate, which is an annual percentage of your home’s value in taxes, can vary by jurisdiction. Property taxes can include taxes based on a county rate and a city rate. The taxable value of the home can differ based on factors like whether it’s being taxed on the market value or on the price it was sold.

How Progressive Tax Rates Work

A tax rate is set by governments that determine what percentage to charge for taxable items like income, purchases, and property.

For example, the U.S. federal government taxes income using progressive tax rates. That means that tax rates get increasingly higher as income levels go up. For tax years 2022 and 2023, the lowest tax rate is 10% and the top income tax rate is 37%.

However, it’s important to realize that earning more income doesn’t mean that all of your income will be assessed at higher tax rates. The first $10,275 of your taxable income (if you’re a single filer) would be taxed at 10%, and then you would be taxed progressively more as your taxable income increases. The tax rate on income over $10,275 and up to $41,775 for single filers is 12%.

So if you have a taxable income of $40,000 per year, a $5,000 raise would mean that not all of your income would be taxed at the next tax rate of 22%. Instead, only the amount over $41,775 (i.e., $3,225) will be taxed at a rate of 22%.

Note

Consider effective tax rates, which blend your rates at the different tax brackets together to tell you what percentage you’ll pay on your income overall.

What Tax Rates Mean for Individuals

Understanding tax rates can help you figure out the best ways to reduce your tax bills legally.

For example, if you took all of the money out of your 401(k) at once, you would owe income tax on the full amount. So if you had several hundred thousand dollars in that account, you might have to pay the top income tax rate of 37%. However, if you took distributions slowly over several years, you could potentially stay below that top tax rate and save money on taxes.

Similarly, understanding tax rates for things like property taxes and sales taxes can help you make better financial decisions. This can include budgeting with sales tax in mind rather than just accounting for the sticker price of a big purchase.

Consider consulting a financial advisor to help guide you through tax-saving strategies that fit your situation.

Frequently Asked Questions (FAQs)

What is an example of tax rate?

A tax rate is simply the percentage of the value of a product, service, income, or property that a government will tax. A common tax is sales tax, the tax you pay when you buy a good or service. Let's say that sales tax rate is 5%, in which case, you would pay 5% of the value of the things you buy in tax. For example, if you bought a new overcoat that cost $100, you would be charged an additional $5 (5% of $100) in sales tax. Actual sales tax rates vary by region, and not all goods and services are subject to it.

What determines tax rate?

Tax rates are determined by governments. Cities, counties, state governments, and the federal government all levy taxes of various types (income, property, sales, excise), and each tier of government set their own rates.

Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

  2. New York City Department of Finance. New York State Sales and Use Tax.”

  3. New Jersey Division of Taxation. “Sales Tax Rate.”

  4.  Fidelity. “Tax-Savvy Withdrawals in Retirement.”

  5. California Department of Tax and Fee Administration. "Sales & Use Tax."

  6. National Conference of State Legislatures. "State, Federal, and Local Taxes."

Related Articles