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Marginal vs Effective Tax Rate

Tax Rates

“What’s my tax rate?” This question is more complicated than it sounds. That’s because we have a Progressive Tax System. When a country has a Progressive Tax System, every person has two different tax rates. A Marginal Tax Rate and an Effective Tax Rate. I’m going to explain what the difference is so you’ll know what percentage of tax Uncle Sam is really taking from you.

Progressive Tax System

Turns out before we can talk about your marginal tax rate or effective tax rate, we first need to teach you about America’s Progressive Tax System.

Simply put, as you make more money, you pay more tax at a higher tax rate. This is done using tax brackets.

Tax Brackets

The IRS uses tax brackets to determine what tax rate your money gests taxed at. Think of tax brackets as buckets. There are 7 tax brackets and as you make more money, your money moves into a bigger bucket (in which you pay more tax.)

Tax brackets in America are complicated because depending on whether you file your taxes as Single, Married, or Head of Household (i.e., single and taking care of somebody) your tax brackets are different.

2022 Tax Brackets
Tax Rate (%)SingleMarriedHead of Household
10%Up to $10,275Up to $20,550Up to $14,650
12%$10,275 to $41,775$20,551 to $83,550$14,650 to $55,900
22%$41,775 to $89,075$83,551 to $178,150$55,901 to $89,050
24%$89,075 to $170,050$178,151 to $340,100$89,051 to $170,050
32%$170,051 to $215,950$340,101 to $431,900$170,051 to $215,950
35%$215,950 to $539,900$431,901 to $647,850$215,951 to $539,900
37%Over $539,900Over $647,850Over $539,900
2022 Tax Brackets

For instance, if you file your taxes as Single and make $50,000, you’re in the 22% tax bracket. However, if you file your taxes as Head of Household and are making $50,000 you’re in the 12% tax bracket (that’s because the government gives you a break if you’re taking care of somebody else.)

How do Tax Brackets Work?

Let’s use a simple example: Steve is single and makes $50,000. According to the chart above his highest bracket is 22%. However, he doesn’t pay 22% tax on all $50,000. It’s broken down like this:

  • The first $10,275 goes in the 10% tax bucket,
  • Money he makes between $10,275 up to $41,775 goes in the 12% tax bucket,
  • The rest of his income up to $50,000 goes into the 22% tax bucket

Example: $50,000 Tax Bracket
IncomeTax BracketCalculationTax per bracket
$0 to $10,27510%$10,275 x 10%$1,027.50
$10,276 to $41,77512%$31,499 x 12%$3,779.88
$41,775 to $50,00022%$8,266 x 22%$1,089.72
Total Tax$6,617.10

As you can see, because of America’s Progress Tax System, Steve paid $6,617.10 in tax. If he paid a flat tax (the same amount for every bracket) he would owe much more tax at 22% ($50,000 x 22% = $11,000.)

Now that we’ve explained Tax Brackets, let’s move onto the two different tax rates – Marginal Tax Rate and Effective Tax Rate

What is Marginal Tax Rate?

Your marginal tax rate is the highest tax bracket you are currently in. An easy way to remember is “Marginal Tax Rate = Your Highest Tax Bracket.”

In Steve’s case, he has a 22% Marginal Tax rate (because it’s his highest bucket.) Which also means the very next dollar he makes, he will pay 22% tax on.

However, if Steve starts making over $89,075, he would go into the next tax bracket, and his marginal tax rate goes from 22% to 24%.

What is Effective Tax Rate?

Effective tax rate is your actual tax rate. It’s the percentage of tax you actually paid vs the income you made. The effective tax rate formula is “Income Tax Paid” divided by “Total Taxable Income.”

Effective Tax Formula

Effective Tax Rate

Effective Tax Rate Example

In Steve’s case he made $50,000 and paid tax of $6,617.10. His effective tax rate is 13.23 ($6,617.10 tax paid / $50,000 total taxable income.)

Effective Rate


Now that you know the basics of tax rates, you understand that there’s a difference between what tax you are actually paying versus what they probably tell you in the news. But that’s not all, we didn’t even include State Taxes, Property Taxes, or your Standard Deduction. In a future article we will be writing an article on how all of those things come together so you understand a full picture of how much tax you’re really paying.

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