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What’s the Difference Between Marginal and Effective Tax Rate? Thumbnail

What’s the Difference Between Marginal and Effective Tax Rate?

Investment Retirement Funding Insights

In the US, we have a progressive tax system, meaning that your tax rate goes up as your income goes up.

What confuses a lot of people is that professionals use terms like Marginal and Effective tax rates and often don’t explain what they mean. 

So let’s explain them.

The marginal tax is the amount of tax you incur on each additional dollar of income.

Let’s look at the chart below and go through a simple example for a married filing jointly tax filer to explain this further.



For this example, let’s assume we have a family who has an adjusted gross income (AGI) of $250,000 (AGI is the amount you earned less deductions taken). How much would they owe in tax?

If you look at the chart you’ll see that they are in the 24% tax bracket, but not all of their income falls in this bracket.

  • Their first $20,550 of income gets taxed at 10% for a total of $2,055
  • Then from $20,551 to $83,550 they would be taxed at 12% for a total of $7,560
  • Then from $83,551 to $178,150 they would be taxed at 22% for a total of $20,812
  • Then from $178,551 to $340,100 they would be taxed at 24% for a total of $17,244
  • Total tax bill of $47,671

As you can see, they do not pay 24% tax on all of their income. They only pay 24% tax on the dollars that fall into that bracket.

This is what we mean by marginal taxes.

The other number to be mindful of is your effective tax rate.

The effective tax rate represents the percentage of a person’s taxable income that they pay in taxes. To find this number you divide your income by your total tax. For this example it would be 19.07% ($250,000 / $47,671 = 19.07), not 24%. This is important to understand because most people think they are taxed based on where their income lies within the tax brackets but they aren’t. So if someone makes $250,000, they often think they are in the 24% tax bracket, but only the dollars they made above $178,150 are taxed at that 24% rate. They are effectively taxed at ~19%.

The key takeaways here are that taxes are progressive, meaning that as your income goes up, so do your taxes. However, not every dollar you make is taxed in your top marginal tax bracket. This creates a lot of opportunities for tax planning. You can fill up tax brackets for Roth conversions to maximize that tax bracket. Or you can take advantage of accounts that reduce your taxable income so no dollars are in a certain tax bracket.

Ryan Burklo is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 333 N. Indian Hill Blvd., Claremont, CA 91711. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Quantified Financial Partners is not an affiliate or subsidiary of PAS or Guardian. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. AR Insurance License #15319412CA Insurance License #0K24924 #2023-151707 Exp 02/2025