- Effective Rate
- Marginal Rate
The effective rate can be explained as the total tax (tax liability minus credits and other tax adjustments) divided by gross income:
Total Tax Liability
Less Credits & Adjustments
_______________________
Gross Income
This number will tell you what % of taxes you paid on your total income after all credits and adjustments have been accounted for. It will include total tax liability (income tax and other taxes such as self-employment taxes) to arrive at the effective rate. This number is good to know for it tells taxpayers what % of their income is consumed by income taxes.
Margin tax rates are described as the rate of tax you are assessed upon earning an additional dollar of income. The current code (2025) has the following tax rates:
10%, 12%, 22%, 24%, 32%, 35%, and 37%
These rates are assessed on taxable income. This is the total income on the tax return after adjustments and itemized deductions (or standard deduction).
For an example of how the marginal rates work, let's look at a married filing jointly taxpayer (2025 brackets):
Income range Tax Bracket
0 to 23,850 10%
23,851 to 96,950 12%
96,951 to 206,700 22%
206,701 to 394,600 24%
394,601 to 501,050 32%
501,051 to 751,600 35%
751,601 and over 37%
Each bracket represents an income range which is taxed at the given rate. At the higher income levels, income is taxed at a higher rate. The result is income taxed at various rates as one goes up the income scale based on one's taxable income on the income tax return.
Keep in mind, knowing one's marginal tax rate is important not only for its impact on income earned (i.e. next dollar earned would be tax at the marginal tax rate), but this applies to deductable expenses as well: if one is in the 24% rate bracket, you will save $24 in taxes for each additional $100 deduction.
LFC provides tax services to individuals and small businesses. Contact the LFC office for assistance via Contact Us on this blog.
