Marginal and Effective Tax Rates

There are two numbers you need to pay attention to when it comes to income taxes: marginal and effective tax rates. 

The marginal tax rate is the rate you pay on your last dollar of taxable income. 

If you’re in the 22% bracket, it doesn’t mean that you are taxed at the 22% rate for all your taxable income. 

It means that the last dollar of your taxable income is taxed at 22%.  

Your effective rate is the rate at which all of your taxable income is taxed. 

You divide your “total tax” by your “taxable” income.

For example, a married couple filing jointly could be in the 22% marginal tax bracket but have an effective tax rate of 17%. 

Your effective tax rate is what you should use in determining your withholding rate from income sources in retirement. 

If you are having to pay a large amount estimated taxes you should look at your effective tax rate to make sure you are withholding enough from your income sources. 

Most CPAs, enrolled agents and tax preparers will have these two numbers on a summary sheet at the front of your tax return.