Tax Guide
Marginal vs Effective Tax Rate
Two tax rates matter most for planning. One tells you the tax on your next dollar, and the other shows your overall average burden.
Quick definitions
- Marginal tax rate: the rate applied to your last dollar of taxable income.
- Effective tax rate: total tax paid divided by total taxable income.
Why your effective rate is usually lower
Federal income tax is progressive. Income is taxed in layers (brackets), not all at your top bracket. That means your marginal rate can be 22% or 24% while your effective rate is meaningfully lower.
How to calculate each rate
Marginal rate
Find your taxable income and filing status, then locate the highest bracket your income reaches.
Effective rate
Effective rate = Total income tax paid / Taxable income
Which rate should you use?
- Use marginal rate for decisions about additional income.
- Use effective rate to understand your overall annual tax burden.
- For true take-home planning, include payroll taxes and state taxes too.
Calculate your numbers
Run your scenario with your filing status, pre-tax deductions, and state to see both tax owed and effective burden.