Marginal vs. effective tax rate: What’s the difference?
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.
- Effective tax rate: This is your average tax rate, or what share of your annual income you pay in taxes. To calculate, simply divide your annual tax bill by your gross annual income, and multiply by 100 to get the percentage tax rate.
- Marginal tax rate: This is the tax rate that applies to the portion of your income that’s in the highest tax bracket. Think of it as the tax rate imposed on your last dollar of income.
There are currently seven tax brackets, starting as low as 10 percent and topping out at 37 percent. (The same tax rates apply in 2024 and 2025, but the income ranges for each bracket differ each year because of IRS inflation adjustments.)
Consider a single taxpayer with taxable income of $40,000 in 2024. That person will pay 10 percent in taxes on income up to $11,600 (a tax bill of $1,160), plus 12 percent on the remaining income of $28,400 (a tax bill of $3,408), because that portion falls into the 12 percent bracket.
The taxpayer’s marginal tax rate is 12 percent, because the last dollar of income falls into the 12 percent tax bracket.
What is effective tax rate?
Your effective tax rate tells you what percentage of your annual income you paid to the IRS. Knowing this rate can give 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 annual income (gross income before taxes) and your annual income tax liability (what you paid in taxes). Hint: Your tax return is a great place to find the amount you paid in taxes.
Now, to figure out your effective tax rate, just divide your total tax liability by your gross annual income, multiply that number by 100, and you’ll get your effective tax rate. This is the percentage of your annual income that you paid in taxes.
Effective tax rate example
The effective tax rate will be different for every individual, based on what they make and deductions they take. But here’s an example:
If an individual earned $100,000 and paid $25,000 in taxes, the effective tax rate would be 25 percent. You solve for the effective tax rate by taking the amount paid in taxes ($25,000) and dividing it by the annual income before taxes ($100,000). The answer: 0.25, or 25 percent. Therefore, the effective tax rate is 25 percent, which means they paid 25 percent of their income in taxes.
What is marginal tax rate?
In the U.S., we use a method of progressive taxation. This means that those who earn less are taxed less 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. The following table shows the current rates and income ranges for 2024.
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 widow | Married filing separately |
|---|---|---|---|---|
| Source: IRS | ||||
| 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 |
As you can see, 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 into 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.
Marginal tax rate example
Let’s say a married couple filing jointly has a taxable income of $120,000 a year. You have to go bracket by bracket to find their marginal tax rate. Here’s an example, 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 |
In this example, the couple’s marginal tax rate would be 22 percent, because their last dollar of income taxed falls into the 22 percent tax bracket. The total tax owed would be $16,506.
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