When it comes to figuring out how much you’ll owe the Internal Revenue Service (IRS), it helps to understand the difference between marginal and effective tax rates. The marginal tax rate is the tax rate applied to the portion of your income in the highest tax bracket. The effective tax rate is the average tax rate applied to your total income.
Knowing how to calculate your marginal vs. effective tax rate can give you perspective on how much you’re paying in taxes. You can also use the comparison between the two to look for opportunities to maximize tax savings.
Table of Contents
Marginal vs Effective Tax Rate: What’s the Difference?
Comparing effective vs. marginal tax rate can be a useful way to see what you’re paying in taxes compared to how you’re being taxed. In terms of the key differences, here are some of the most important things to know when assessing marginal tax rate vs. effective tax rate.
• Purpose: Marginal tax rates determine the tax rate that you’re subject to, based on your income. Your effective tax rate reflects the percentage of income you pay in taxes.
• Calculation: Your marginal tax rate is calculated by applying the appropriate tax rate to each level of income you have. Effective tax rates are calculated by dividing your tax liability by your taxable income.
• Range: Marginal tax rates range from 10% to 37%. There is no upper or lower limit for effective tax rates; they’re typically lower than marginal tax rates.
• Application: Your marginal tax rate tells you the tax rate on your last dollar of income. The effective tax rate lets you see what share of your annual income you actually pay in taxes.
| Marginal Tax Rate | Effective Tax Rate |
|---|---|
• Marginal tax rates determine how much you pay in taxes, based on income. • They’re calculated by applying different tax rates to each level of income. • The highest marginal tax rate is 37% while the lowest is 10%. • Marginal tax rates can help you estimate how much tax you’ll owe on any additional income. | • Effective tax rates reflect the percentage of income paid in taxes. • They’re calculated by dividing taxes paid by taxable income. • There is no highest or lowest effective tax rate. • Effective tax rates can help you see how much of your income goes to taxes. |
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What Is a Marginal Tax Rate?
The marginal tax rate is the amount of tax that applies to each additional dollar of income earned. The higher your income, generally the higher your marginal tax rate will be.
The U.S. uses a progressive tax system in which your tax rate increases as your taxable income increases. Taxable income is the amount of income subject to tax, after deductions and exemptions are factored in. Your marginal tax rate corresponds to your tax bracket, which is determined by your income and your filing status.
As of 2025, there are seven tax brackets, ranging from 10% at the lowest end to 37% at the highest. Marginal tax rates increase once you cross certain income thresholds. A difference of just one dollar can put you in a higher marginal tax bracket. However, only that last dollar will be taxed at that higher rate.
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How Does Marginal Tax Rate Work?
Marginal tax rates work by determining which tax rate applies at various income levels. As mentioned, they’re based on taxable income only. The more tax credits and tax deductions you’re able to claim, the more you can reduce your taxable income for the year.
When you file your tax return, your taxable income is what determines which marginal tax rates you pay. Different marginal tax rates apply for each tier of income you have across different tax brackets.
If you’re wondering what tax bracket you’re in, here’s how marginal tax rates add up for tax year 2024 (filed in 2025) and tax year 2025 (filed in 2026).
2024 Income Tax Brackets | |||
|---|---|---|---|
| Tax Rate | For Single Filers | For Married Individuals Filing Joint Returns | For Heads of Households |
| 10% | $0 to $11,600 | $0 to $23,200 | $0 to $16,550 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,701 to $609,350 |
| 37% | $609,351 or more | $731,201 or more | $609,351 or more |
2025 Income Tax Brackets | |||
|---|---|---|---|
| Tax Rate | For Single Filers | For Married Individuals Filing Joint Returns | For Heads of Households |
| 10% | $0 to $11,925 | $0 to $23,850 | $0 to $17,000 |
| 12% | $11,925 to $48,475 | $23,850 to $96,950 | $17,000 to $64,850 |
| 22% | $48,475 to $103,350 | $96,950 to $206,700 | $64,850 to $103,350 |
| 24% | $103,350 to $197,300 | $206,700 to $394,600 | $103,350 to $197,300 |
| 32% | $197,300 to $250,525 | $394,600 to $501,050 | $197,300 to $250,500 |
| 35% | $250,525 to $626,350 | $501,050 to $751,600 | $250,500 to $626,350 |
| 37% | $626,351 or more | $751,601 or more | $626,351 or more |
Calculating Marginal Tax Rates
Calculating marginal tax rates is a simple process that requires you to do two things.
• Calculate your total taxable income for the year
• Apply the appropriate marginal income tax rates to each level of taxable income
For example, say that you and your spouse had a gross income of $100,000 and a taxable income of $70,800 in 2024 and file jointly.
Here’s how your marginal tax rates would apply: 10% on your earnings up to $23,200 and 12% on the rest of your earnings.
• $23,200 x 0.10 = $2,320
• $47,600 x 0.12 = $5,712
In this example, you’d be subject to two marginal tax rates: 10% and 12%. Your total tax owed based on the marginal tax rate calculation would be $8,032. The higher your income, the more tax rates you’d be subject to.
What Is an Effective Tax Rate?
The effective tax rate, also referred to as average tax rate, is the total tax paid divided by taxable income. Average tax rates tell you how much of your income you paid in taxes overall.
Your effective tax rate includes federal taxes but typically excludes other taxes you pay, such as:
• State and local income taxes
• Sales taxes
• Property taxes
Compared to marginal tax rates, determining your effective tax rate can be a simpler calculation. Average tax rates are usually lower than marginal tax rates due to the way each one is determined.
How Does Effective Tax Rate Work?
Effective tax rates tell you what percentage of your income you paid in taxes, after deductions are taken out. By looking at the average rate your income was taxed at, the effective tax rate is a more accurate representation of your overall tax liability than your marginal tax rate.
There’s no standardized chart that breaks down effective tax rates. They’re different for every person, since they’re dependent on your income, the deductions and exemptions you claim, and the amount of tax you pay based on your marginal tax rate.
You can, however, compare your effective tax rate vs. marginal tax rate by calculating your effective tax rate (details on that below) and comparing it to your marginal tax rate (the highest tax bracket your income falls into) to get a sense of how they differ. Again, you will likely see that even though you may be in a higher tax bracket, the actual percentage of income you pay in taxes is a lower number.
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Calculating Effective Tax Rates
Determining your effective tax rate is a fairly simple calculation. It requires you to know two things:
• Your annual income
• Your federal tax liability
To get your effective tax rate, you’d divide your federal taxes paid by your taxable income, then multiple that number by 100. Again, this is income after deductions which reduce your taxable income.
Going back to the previous example, a married couple had a taxable income of $70,800 and paid $8,032 in taxes for the year. If you divide the $8,032 they paid in taxes by their $70,800 in taxable income, then multiply that number by 100, you’ll see that their effective tax rate works out to be 11.34%.
Tips for Paying Your Taxes
Knowing how to prepare for tax season can make the process of filing your return easier. Here are a few tips that can help you get ready for tax filing with less stress.
• Get organized. Keeping track of receipts, paystubs, and other forms means you’ll have everything you need to file once tax season begins. Starting the process early can prevent a potentially anxiety-provoking rush to figure out what is a W-2 and whether you received the 1099s you need to complete your return.
• Track income. If you’re self-employed or have a side hustle, it’s a good idea to keep your own records for income even if you expect to get one or more IRS Form 1099.
• File early. Filing early can help you get your refund faster if you’re owed one since you’re beating the rush.
• Get help if you need it. If you need tax season help, tax filing software programs can make putting your return together easier. Or you might want to work with a professional tax preparer.
If you’re looking for free or low-cost options, you can find a list of resources at the IRS website.
• Choose direct deposit. If you’re getting money back when you file, direct deposit can be the fastest way to get paid. For example, a refund from an electronically filed return could be with you in less than three weeks.
The Takeaway
Understanding the difference between marginal tax rate vs. effective tax rate can give you perspective on where your hard-earned dollars go. Marginal tax rates show you the different percentages of taxes you may pay on your income, while your effective tax rate tells you your overall tax rate.
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FAQ
Between marginal and effective tax rates, which one is higher?
Marginal tax rates are usually higher than effective tax rates. Your marginal tax rate refers to the rate you pay on the top portion of your income. It’s the highest rate you pay, but typically doesn’t apply to all of your income. Your effective tax rate, on the other hand, is the average rate you pay on all your income.
How can I lower my effective tax rate?
Claiming more deductions can lower your effective tax rate. For example, if you normally claim the standard deduction, you might consider how you could reduce your taxable income by itemizing things like charitable contributions or interest paid on a mortgage loan.
What does it mean if the effective tax rate is negative?
A negative effective tax rate can mean that you qualify for refundable tax credits, such as the Earned Income Tax Credit or Child Tax Credit, that add up to more than what you owe in taxes. Keep in mind that you must file a tax return to claim refundable tax credits.
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