What is Marginal vs. Effective Tax Rate?
Definition Your marginal tax rate is the rate applied to your next dollar of income, meaning the top bracket your income reaches. Your effective tax rate is your total tax divided by your total income, which is the average rate you actually pay across all brackets. The effective rate is almost always lower than the marginal rate because of the progressive bracket structure.
Clients often confuse the two, and understanding the difference is essential for evaluating decisions like an extra deduction, a Roth conversion, or additional income.