Key takeaways
- A taxpayer’s taxable income is separated into tax brackets, each with its own tax rate. Each tax bracket is defined by an income range.
- Effective tax rate is the rate you pay on your annual income. To calculate, divide your annual tax bill by your taxable income, and multiply by 100 to get the percentage tax rate. Your annual tax bill and taxable income are shown on your tax return.
- Marginal tax rate is the tax rate that applies to the portion of income that’s in your highest tax bracket. Think of it as the tax rate imposed on your last dollar of income.
Knowing the difference between marginal and effective tax rates can help you understand what you’ll owe the IRS, and that can help you better manage your personal finances.
Because the U.S. has a progressive income tax system, rather than a flat tax, a taxpayer’s effective tax rate generally is different — and often lower than — their marginal tax rate.
Effective tax rate: What it is and how to calculate it
Your effective tax rate tells you what percentage of your annual income you paid to the IRS. Knowing this rate can give you a rough estimate of your future tax bills, helping you budget and plan for the future.
To calculate your effective tax rate, you’ll need two pieces of information: your taxable income and your annual income tax liability (what you paid in taxes). Your tax return is a great place to find both of these figures. On Form 1040, taxable income is listed on line 15 and your total tax is on line 24.
To figure out your effective tax rate, divide your total tax liability by your taxable income, multiply that number by 100, and you’ll get your effective tax rate. This is the percentage of your income that you paid in taxes.
For example, if your taxable income was $100,000 and you paid $20,000 in taxes, your effective tax rate is 20 percent.
The effective tax rate will be different for every taxpayer, based on what they earn and the deductions they take.
Marginal tax rate: What it is and how to calculate it
Your marginal tax rate is the tax rate you pay on your last dollar of income. The easiest way to understand this is to look at the tax brackets below. You simply find your filing status and income amount in the tax bracket table, and then see what tax rate applies to that dollar amount. That’s your marginal tax rate.
For example, if you’re a single filer and your taxable income is $50,000, then your marginal tax rate is 22 percent (on income earned in 2024). However, if your taxable income is $150,000, then your marginal tax rate is 24 percent.
2024 tax brackets
These are the 2024 tax brackets, for taxes due April 2025 or October 2025 with an extension:
| Tax rate | Single | Head of household | Married filing jointly or qualifying surviving spouse |
Married filing separately |
|---|---|---|---|---|
| 10% | $0 to $11,600 | $0 to $16,550 | $0 to $23,200 | $0 to $11,600 |
| 12% | $11,601 to $47,150 | $16,551 to $63,100 | $23,201 to $94,300 | $11,601 to $47,150 |
| 22% | $47,151 to $100,525 | $63,101 to $100,500 | $94,301 to $201,050 | $47,151 to $100,525 |
| 24% | $100,526 to $191,950 | $100,501 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 |
| 32% | $191,951 to $243,725 | $191,951 to $243,700 | $383,901 to $487,450 | $191,951 to $243,725 |
| 35% | $243,726 to $609,350 | $243,701 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 |
| 37% | $609,351 or more | $609,351 or more | $731,201 or more | $365,601 or more |
| Source: IRS |
Marginal vs. effective tax rates: Why they’re different
In the U.S., we use a method of progressive taxation. This means that those who earn less are taxed at lower tax rates than those who earn more. Under this method, a taxpayer’s taxable income is separated into tax brackets, each with its own tax rate. Each tax bracket is defined by an income range. The tax brackets that taxpayers fall into determine the tax rates that will be applied to their taxable income.
Currently there are seven brackets, with tax rates ranging from 10 percent to 37 percent. You can find which bracket you fall in based on your filing status and your taxable income (see tax table above).
As you can see from the tax tables above, you don’t pay a fixed tax rate on your entire income. Instead, after you figure out your taxable income (which is gross income reduced by tax deductions), your income is portioned out into different tax brackets. You’ll pay the bracket’s specified tax rate on the dollar amount of income that falls within the bracket’s income range.
Your first dollar earned will be taxed at the rate for the lowest tax bracket, and the last dollar earned will be taxed at the rate of the highest bracket that you fall into, based on your income.
So, you go bracket by bracket, paying the specified tax rate on the amount of income that falls within that tax bracket, until you’ve reached the bracket that matches your total taxable income. Because of this system, your effective (or average) tax rate can be significantly lower than your marginal tax rate. Your marginal tax rate is the rate assigned to your last dollar of income.
Trump’s back in office — here’s what to expect for your taxes
With President Trump back for a second term, Americans can expect to see major tax-law changes in the years ahead.
Read more
Consider this example: Let’s say a married couple filing jointly has taxable income of $120,000 a year. You have to go bracket by bracket to find their effective tax rate. Here’s how their tax bill works out, based on the 2024 tax brackets.
| Tax rate | Taxable income range | Tax owed |
| 10% | $0 – $23,200 | $2,320 ($23,200 taxable dollars x 0.10) |
| 12% | $23,201 – $94,300 | $8,532 ($71,100 taxable dollars x 0.12) |
| 22% | $94,301 – $201,050 | $5,654 ($25,700* taxable dollars x 0.22) *remember: their total taxable income is $120,000 |
This couple’s total tax is $16,506 (that’s $2,320 + $8,532 + $5,654). If you divide $16,506 by $120,000, you get an effective tax rate of 13.76 percent. And this couple’s marginal, or top, tax rate? It’s 22 percent.
Learn more:
Read the full article here
