Marginal vs. Effective Tax Rate

The federal income tax system in the United States is progressive, meaning that different portions of your income are taxed at different rates. As your income increases, it moves through a series of tax brackets, with each bracket applying a higher rate to the income within that range. Your marginal tax rate is the rate applied to the highest bracket your income reaches — essentially, the rate you would pay on the next dollar of income.

Your effective tax rate, by contrast, is the overall average rate of tax you pay on your total income. Because the lower portions of your income are taxed at lower rates, your effective rate is always lower than your marginal rate (unless all of your income falls within the lowest bracket). For example, a single filer with $100,000 in taxable income in 2025 might have a marginal rate of 22% but an effective rate closer to 15%.

Understanding the distinction between these two rates is important for evaluating financial decisions. For instance, if you are considering a Roth conversion, the relevant rate is your marginal rate — because the converted amount is added on top of your existing income and taxed at the margin. Similarly, deductions and pre-tax contributions reduce your tax bill at the marginal rate, not the effective rate.

It is also worth noting that your marginal rate may not be just the federal income tax bracket. When you factor in state income taxes, the phaseout of deductions or credits, IRMAA thresholds, and the taxation of Social Security benefits, the true marginal rate on additional income can be significantly higher than the stated federal bracket. Financial planners sometimes refer to this as the "real" or "all-in" marginal rate.