Marginal Tax Rate

Your marginal tax rate is the tax rate you pay on your last dollar of income—the rate that applies to your next dollar earned. In a progressive tax system like the U.S., different portions of your income are taxed at different rates. Your marginal rate tells you what rate applies to income above your current bracket threshold.

Effective Tax Rate

Your effective tax rate (also called average tax rate) is your total tax divided by your total income. It represents the average percentage of your income that goes to taxes. Because lower portions of your income are taxed at lower rates, your effective rate is always lower than your marginal rate (unless all your income falls in the lowest bracket).

Why Marginal Rate Does NOT Apply to All Income

A common misconception is that moving into a higher tax bracket means all your income is taxed at that higher rate. This is not true! Only income above the bracket threshold is taxed at the higher rate. For example, if you move from the 22% to the 24% bracket, only income above the 24% threshold is taxed at 24%. Your previous income remains taxed at the lower rates (10%, 12%, 22%).

How Standard Deduction Works

The standard deduction reduces your taxable income. If you select "Gross Income" mode, this tool applies an estimated standard deduction based on your filing status to approximate your taxable income. Your marginal and effective rates are then calculated based on this taxable income, not your gross income.