Marginal Tax Rate vs Effective Tax Rate: What Is the Difference?

Many Americans are terrified of earning more money because they fear they will "jump into a higher tax bracket" and end up with less take-home pay. This fear is based on a misunderstanding of marginal versus effective tax rates.

Marginal Tax Rate (The "Bracket")

This is the tax rate you pay on the next dollar you earn. It only applies to the income within that specific tier.

Effective Tax Rate (The "Real Rate")

This is the percentage of your total income that goes to taxes after all deductions are taken. Because of our progressive system, your effective rate is almost always lower than your marginal rate.

Why You Never Lose Money by Earning More

Because you are only taxed the higher rate on the dollars above the bracket threshold, you will always have more money after taxes when you get a raise.

Get a clear look at your tax breakdown with our Tax Bracket Calculator.