Effective Tax Rate vs. Marginal Tax Bracket: What You Need to Know

Your tax bracket and the percentage of your income you actually pay are two different things.

Matthew Frankel, CFP
Matthew Frankel, CFP
Apr 8, 2017 at 8:23AM
Investment Planning

Your marginal tax bracket, or marginal tax rate, and the actual tax rate you pay on your income are usually two different numbers. This is because you don't pay your marginal tax rate on your entire income, thanks to deductions, exemptions, tax credits, and the way the tax brackets are structured. Here's what the marginal tax brackets are, what they mean, and what an effective tax rate means.

The 2019 U.S. tax brackets

As of this writing, there are seven U.S. tax brackets, ranging from 10% to 37%. Households that earn higher incomes are in higher tax brackets. For the 2019 tax year, here are the seven U.S. tax brackets and the income ranges for the four main filing statuses.

Marginal Tax Rate

Single

Married Filing Jointly

Head of Household

Married Filing Separately

10%

$0-$9,700

$0-$19,400

$0-$13,850

$0-$9,700

12%

$9,701-$39,475

$19,401-$78,950

$13,851-$52,850

$9,701-$39,475

22%

$39,476-$84,200

$78,951-$168,400

$52,851-$84,200

$39,476-$84,200

24%

$84,201-$160,725

$168,401-$321,450

$84,201-$160,700

$84,201-$160,725

32%

$160,726-$204,100

$321,451-$408,200

$160,701-$204,100

$160,726-$204,100

35%

$204,101-$510,300

$408,201-$612,350

$204,101-$510,300

$204,101-$306,175

37%

Over $510,300

Over $612,350

Over $510,300

Over $306,175

Data source: IRS.

Note that these are only applied to your taxable income. In other words, before these rates are applied, your personal exemption of $4,100 per person is subtracted, as are the tax deductions to which you are entitled. If you're entitled to any tax credits, these are applied after your income tax is calculated. The point is that your taxable income is usually significantly lower than your total, or gross income.

Your marginal tax bracket

The key takeaway from the tax brackets is that different rates can be applied to your income. For example, even if you're single and earn $1 million per year, you'll still pay a tax rate of 10% on the first $9,700 of your taxable income.

This is why the tax brackets are also referred to as "marginal" tax rates. They refer to the tax rate you pay on your last dollar of income, not on your entire taxable income. If you're single and have a taxable income of $1 million, you'll only pay the top 37% tax rate on the amount above $510,300.

Effective tax rate: How much you're actually paying

In a nutshell, your effective tax rate is the total amount of federal income tax you pay, as a percentage of your total income. For example, if I earned a total of $50,000 last year and paid $5,000 in federal income tax, my effective tax rate would be 10%, even though my marginal tax rate would be higher.

Using a calculator to do financial math.

Image source: Getty Images.

An example of calculating an effective tax rate

As an example, let's say that a married couple filing jointly earns a total of $100,000 this year. They opt for the $24,000 standard deduction, making their taxable income $76,000.

This puts them in the 12% marginal tax bracket. They pay 10% on the first $19,400 of this amount, or $1,940, per the tax brackets listed above. Then they pay 12% on the remaining $56,600 in income, an additional $6,792. Therefore, their total federal income tax is $1,940 plus $6,792, for a total of $8,732.

Based on their total income of $100,000, this couple's $8,732 in federal income tax translates to an effective tax rate of 8.7%.

The bottom line

Your effective tax rate is the important number to know, as it tells you the actual percentage of your income that you're paying to the IRS, and is often significantly lower than your marginal tax bracket.