Knowing the difference between marginal and effective tax rates can help you understand what you’ll owe the IRS, and that can help you better manage your personal finances.

Because the U.S. has a progressive income tax system, rather than a flat tax, a taxpayer’s effective tax rate generally is different — and often lower than — their marginal tax rate.

Effective tax rate: What it is and how to calculate it

Your effective tax rate tells you what percentage of your annual income you paid to the IRS. Knowing this rate can give you a rough estimate of your future tax bills, helping you budget and plan for the future.

To calculate your effective tax rate, you’ll need two pieces of information: your taxable income and your annual income tax liability (what you paid in taxes). Your tax return is a great place to find both of these figures. On Form 1040, taxable income is listed on line 15 and your total tax is on line 24.

To figure out your effective tax rate, divide your total tax liability by your taxable income, multiply that number by 100, and you’ll get your effective tax rate. This is the percentage of your income that you paid in taxes.

For example, if your taxable income was $100,000 and you paid $20,000 in taxes, your effective tax rate is 20 percent.

The effective tax rate will be different for every taxpayer, based on what they earn and the deductions they take.

If you don’t know how much you paid in taxes, you can calculate your effective tax rate using just your taxable income and the IRS tax bracket table. (For an example of how to do this, see our example below.)

Marginal tax rate: What it is and how to calculate it

Your marginal tax rate is the tax rate you pay on your last dollar of income. The easiest way to understand this is to look at the tax brackets below. You simply find your filing status and income amount in the tax bracket table, and then see what tax rate applies to that dollar amount. That’s your marginal tax rate.

For example, if you’re a single filer and your taxable income is $50,000, then your marginal tax rate is 22 percent (on income earned in 2025). However, if your taxable income is $150,000, then your marginal tax rate is 24 percent.

2025 tax brackets

These are the 2025 tax brackets, for taxes due April 2026 (or October 2026 with an extension):

Marginal vs. effective tax rates: Why they’re different

In the U.S., we use a method of progressive taxation. This means that those who earn less are taxed at lower tax rates than those who earn more. Under this method, a taxpayer’s taxable income is separated into tax brackets, each with its own tax rate. Each tax bracket is defined by an income range. The tax brackets that taxpayers fall into determine the tax rates that will be applied to their taxable income.

Currently there are seven brackets, with tax rates ranging from 10 percent to 37 percent. You can find which bracket you fall in based on your filing status and your taxable income (see tax bracket table above).

As you can see from the tax bracket table above, you don’t pay a fixed tax rate on your entire income. Instead, after you figure out your taxable income (which is gross income reduced by tax deductions), your income is portioned out into different tax brackets. You’ll pay the bracket’s specified tax rate on the dollar amount of income that falls within the bracket’s income range.

Your first dollar earned will be taxed at the rate for the lowest tax bracket, and the last dollar earned will be taxed at the rate of the highest bracket that you fall into, based on your income.

So, you go bracket by bracket, paying the specified tax rate on the amount of income that falls within that tax bracket, until you’ve reached the bracket that matches your total taxable income. Because of this system, your effective (or average) tax rate can be significantly lower than your marginal tax rate. Your marginal tax rate is the rate assigned to your last dollar of income.

Marginal vs. effective tax rates: An example

Consider this example: Let’s say a married couple filing jointly has taxable income of $120,000 in 2025. You have to go bracket by bracket to find their effective tax rate. Here’s how their tax bill works out, based on the 2025 tax brackets.

This couple’s total tax bill is $16,228 (that’s $2,385 + $8,772 + $5,071). If you divide $16,228 by $120,000, you get an effective tax rate of 13.52 percent. And this couple’s marginal, or top, tax rate? It’s 22 percent.

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