Marginal vs effective tax rate
Marginal rate is the rate on your next dollar of income; effective rate is the average rate across all your income.
Tax brackets are tiered. In the US, you don't pay one flat rate on all your income — different chunks of income get taxed at different rates. The marginal rate is the rate on the next dollar you earn. The effective rate is your total tax divided by your total income — the average across all brackets.
Example (2024 US single filer, illustrative):
- First ~$11,600 taxed at 10%
- Next chunk to $47,150 taxed at 12%
- Next chunk to $100,525 taxed at 22%
- And so on
If you earn $80,000, your marginal rate is 22% (your next dollar is taxed at 22%) but your effective rate is around 14% (the average across all brackets you spanned).
This distinction matters because people often refuse a raise or a side income because "it'll push me into the next bracket." But only the income above the bracket threshold gets the higher rate, not your whole income. You always come out ahead with more income.
Effective rate is the number to compare year-over-year and to use when budgeting. Marginal rate is the number that matters for decisions about extra income, deductions, and pre-tax contributions.
See also
- Tax deduction vs tax credit — A deduction reduces your taxable income; a credit reduces your tax bill directly. Credits are worth more, dollar for dollar.
- Pre-tax vs post-tax contributions — Pre-tax contributions reduce your taxable income now but are taxed at withdrawal. Post-tax (Roth) contributions don't reduce taxes now but are tax-free at withdrawal.
- Gross vs net income — Gross income is what you earn before deductions; net income is what actually arrives in your bank account.
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