Marginal vs. effective tax rate
Your marginal rate is the tax on your next dollar of income; your effective rate is total tax divided by income.
Effective rate = Total tax ÷ Income ; Marginal rate = Change in tax ÷ Change in income
Explanation
US federal income tax is progressive: income is taxed in layers, and each layer has its own rate. Your marginal rate is the rate on the top layer, the one your next dollar would land in. Your effective rate is your total tax as a share of your income, a blend of all the layers.
A common misconception is that moving into a higher bracket raises the tax on all your income. It does not. Only the dollars inside the higher bracket are taxed at the higher rate.
For planning, the marginal rate is usually what matters. A traditional 401(k) contribution saves tax at your marginal rate today. A Roth conversion costs tax at your marginal rate in the year you convert. Comparing today’s marginal rate with your expected marginal rate in retirement is the core of the traditional-versus-Roth decision.
Be aware that your true marginal rate can be higher than your bracket. Phase-outs of credits and deductions, the taxation of Social Security benefits, capital gains stacking, NIIT, Medicare IRMAA surcharges and state taxes can all add to the cost of an extra dollar. In scenarios, the app can show both the effective rate for a year and the marginal rate on additional income.
Example
A single filer in 2026 earns $100,000 in wages and takes the $16,100 standard deduction, leaving $83,900 of taxable income.
- 10% on the first $12,400 = $1,240
- 12% on $12,400 to $50,400 ($38,000) = $4,560
- 22% on $50,400 to $83,900 ($33,500) = $7,370
- Total federal income tax: $13,170
Rates:
- Marginal rate: 22% (an extra $1,000 of wages adds $220 of tax)
- Effective rate on taxable income: $13,170 ÷ $83,900 = 15.7%
- Effective rate on gross income: $13,170 ÷ $100,000 = 13.2%