Taxpayers can calculate their effective tax rate by dividing the tax that they pay after income reductions such as adjustments, deductions and tax credits by their total gross income, reports Fox Business. Effective tax rates for taxpayers are often significantly different than standard rates according to tax brackets.
Although gross income determines tax brackets, taxpayers can usually make a number of legitimate subtractions before determining their taxable income, notes Fox Business. Adjustments to income are similar to deductions, but taxpayers do not have to itemize them, explains About.com. These include contributions to individual retirement accounts, 401(k) accounts and other retirement plans. Other possible income adjustments are payments on student loan interest, alimony payments and qualifying educational expenses.
After adjusting their incomes, taxpayers can further reduce the taxable amount by claiming the standard deduction or itemizing deductions, according to Fox Business. Deductions that taxpayers can itemize include state taxes, property taxes, interest on mortgages and business expenses. Other deductible expenses include vehicle registration fees, tax preparation fees and donations to charity, adds About.com. After calculating the amount of their itemized deductions compared to standard deductions, taxpayers should always choose the option that saves them more. Additionally, the Earned Income Credit, Lifetime Learning Credit, Hope Credit, tax credits for adoption and other available tax credits further reduce taxable income.