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How Do Marginal Tax Rate and Effective Tax Rate Work

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In this article, I will explain a few basic tax concepts related to our Federal income tax system that includes Tax Brackets, Marginal Tax Rate, and Effective Tax Rate. In the United States, we have a progressive tax system where people who earn more money generally pay more.

Tax Brackets

There are seven Federal tax brackets, and you can see the most up-to-date tax brackets here. The table below gives you the 2019 marginal tax brackets for single, married couples filing jointly, and head of household.

Marginal
Tax Rate
Single Married, filing jointly Head of Household
10% $0 to $9,700 $0 to $19,400 $0 to $13,850
12% $9,701 to $39,475 $19,401 to $78,950 $13,851 to $52,850
22% $39,476 to $84,200 $78,951 to $168,400 $52,851 to $84,200
24% $84,201 to $160,725 $168,401 to $321,450 $84,201 to $160,700
32% $160,726 to $204,100 $321,451 to $408,200 $160,701 to $204,100
35% $204,101 to $510,300 $408,201 to $612,350 $204,101 to $510,300
37% $510,301 or more $612,351 or more $510,301 or more

Source: IRS.gov

Marginal Tax Rate

One of the biggest misconceptions is that your entire income is taxed at your tax bracket. For example, if you make $100,000, you have to pay 24% or $24,000. In fact, that’s not the case at all.

Let’s look at the following example using 2019 rates, suppose your taxable income (after deductions and exemptions) is exactly $100,000 and your status is Single; then your tax would be calculated like this:

$9,700 – $0 = $9,700 x 10% = $970.00
$39,475 – $9,700 = $29,775 x 12% = $3,573.00
$84,200 – $39,475 = $44,525 x 22% = $9.839.50
$100,000 – $84,200 = $15,800 x 24% = $3,792.00
Total = $18,174.50

The $100,000 taxable income puts you in the 24% marginal tax rate bracket, but this only applies to income above $84,200. Income below that amount is taxed at the appropriate tax rate as per the above chart.

When we are talking about tax deductions, e.g., your IRA contribution or charitable donations, we often talk about reducing our tax burden at the highest tax bracket. For example, “My $6,000 IRA contribution would cut my taxable income by $1,440 at my 24% marginal tax rate.” This is accurate because your tax deductions are applied against your highest tax bracket income first.

Effective Tax Rate

Effective tax rate, or your actual tax rate, is simply the amount you are paying to the government as a percentage of your taxable income. In the example above, your effective tax rate is 18.17% ($18,175 divided by $100,000).

This means that your effective tax rate will always be less than your marginal tax rate.

I hope this article helps you better understand our tax system, specifically, tax brackets, marginal tax rate, and effective tax rate.

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Zengirl
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Pinyo,

You make Tax write up easy enough for most to understand. I always learn something new here. Great work.

Bucksome
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Bucksome

Thanks for the clear, concise explanation. After all these years of paying taxes, I just am learning from your article about marginal tax rate.

Cathy
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Cathy

Thank you for such a clear explanation! This was my first time to stop here and I will be back for more knowledge.

How Do Marginal Tax Rate and Effective Tax Rate Work

by Pinyo Bhulipongsanon time to read: 1 min
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