Marginal vs. Effective Tax Rate: What They Mean — and Why Both Matter

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Marginal tax rate is the rate you pay on your last dollar of income, based on your tax bracket. Effective tax rate is the average rate you pay on all of your income. Understanding the difference is key to making smarter financial decisions, from budgeting to tax planning.

Marginal vs. Effective Tax Rate: At a Glance

Marginal tax rate and effective tax rate are two ways to express the percentage of your income that goes to tax. But they’re used for different purposes. For example:

Application	Marginal Tax Rate	Effective Tax Rate
Bonuses	Yes	No
Side gigs	Yes	No
Overtime	Yes	No
Filing taxes	Yes	No
Determining true tax burden	No	Yes

Marginal vs. Effective Tax Rate: Key Differences

Here’s a side-by-side look at the difference between marginal and effective tax rates.

What Is a Marginal Tax Rate?

The U.S. uses a progressive tax system, where high earners pay a higher percentage of their income than low earners do to keep the burden fair across incomes. That system divides income into seven levels, called tax brackets. Your marginal tax rate is the rate for your tax bracket, but it only applies to your last dollar of income.

2025 Federal Tax Brackets

As you can see in the table below, tax rates range from 10% to 37%, depending on the tax bracket. Because income taxes are progressive, your tax starts at the lowest rate and progressively increases as your earnings grow.

The following brackets are for tax year 2025.

Marginal Tax Rate Example

Imagine you’re a single filer earning $60,000 a year. Your marginal tax rate is 22% because that’s the bracket your last dollar falls into.

What Is an Effective Tax Rate?

Your effective tax rate is the average rate you pay on all your income. It’s calculated by dividing your total tax owed by your total taxable income. You can use any calculator to figure it out.

How To Calculate Your Effective Tax Rate

Here’s a formula you can use to find out your effective tax rate:

• Effective tax rate = (total tax owed ÷ total taxable income) x 100

Effective Tax Rate Example

If your total tax bill is $6,500 on $60,000 of income, your effective tax rate is:

• $6,500 ÷ $60,000 = 0.1083, or 10.83%

That’s much lower than your marginal rate of 22% because only part of your income is taxed at the highest bracket.

Why Marginal and Effective Tax Rates Matter for Real-Life Decisions

Knowing the difference between your marginal and effective tax rate helps you:

• Estimate taxes on extra income: For example, a raise, a bonus or side gig income is taxed at your marginal rate.
• Evaluate job offers: The effective rate tells you how much of your taxable compensation you’ll see in your take-home pay.
• Plan for tax deductions and credits: Reducing taxable income can keep you in a lower marginal bracket.
• Understand your overall tax burden: Your effective rate shows the true percentage you pay across all income.
• Budgeting and financial planning: The effective rate lets you know how much money you have to work with.

Common Myths About Tax Brackets

Tax brackets can be confusing, so it’s no wonder that people have misconceptions. Here are some common ones debunked:

• Myth: The rate for your tax bracket is the rate you pay on all your income.
• Fact: It’s the rate you pay on your last dollar of income. Your first $11,600 is taxed at 10%. The next $35,550 (from $11,601 to $47,150 in income) is taxed at 12%, and so on.

• Myth: It’s not worth working overtime if it’ll bump you into a higher tax bracket because the higher tax will leave you worse off.
• Fact: You’ll only pay a higher tax rate on the portion of your earnings that fall within the new tax bracket.

• Myth: Wealthy people pay less tax.
• Fact: Although wealthy people often have more ways to avoid tax, an analysis by the Tax Foundation found that the top 1% earns 21% of America’s total adjusted gross income (AGI), but they pay 38.5% of the total tax paid. In comparison, the bottom 50% earns 11.3% of the total AGI and pays 3.1% of the total tax.

How State and Payroll Taxes Fit In

Your marginal tax rate is for federal income tax only, so state and payroll taxes don’t factor in. But you can and should include them when calculating your effective tax rate.

Accounting for all of the tax you pay provides the most accurate measure of your tax burden and your after-tax income.

Ways To Reduce Your Tax Rates

Want to pay less in taxes? Here are some legal ways to lower both rates:

• Maximize deductions and credits: Claim the standard deduction or itemize if it saves you more. You can also use credits like the child tax credit or education credits.
• Time your income wisely: Delay income to the following year if it keeps you in a lower bracket.
• Use pre-tax accounts: Contribute to 401(k)s and health savings accounts (HSAs) to lower taxable income.
• Consider tax-loss harvesting: Offset capital gains by selling investments at a loss.

Key Takeaways

Keep the following in mind as you evaluate and try to lower your taxes.

• Your marginal tax rate determines how much tax you’ll pay on additional income, while your effective tax rate shows your overall tax burden.
• Investing in tax-advantaged accounts and claiming all the deductions and credits you qualify for reduces your taxable income and can reduce your marginal and effective tax rates as well.
• Understanding the difference between marginal vs. effective tax rates can help you make smarter financial decisions, like when to take a bonus, contribute to pre-tax accounts or claim deductions.
• When in doubt, consult a tax professional to make sure you’re on the right track.

Andrew Lisa contributed to the reporting for this article.

Information is accurate as of Jan. 18, 2026.

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