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Taxes are a frustrating nightmare through which you have to wade. In the US, they’re made harder still by the fact that American citizens are taxed on a progressive tax scale (taxes rise with your income). That’s what creates your marginal and effective tax rates.

Marginal tax rates are the rate of tax that applies to the final dollar of your income.

For example, let’s say you’re single making $35,000 a year. That puts your marginal tax rate at 15%, according to the Tax Foundation. However, it’s important to remember the fact that you only pay that 15% tax rate on the last dollar of your income.
The bracket below 15% – 10% for those making $0 – $9,275 a year – also factors into your tax rate. You only pay 15% tax on your income after you’ve passed the $9,275 threshold.

Now, your effective tax rate is different. That rate refers is the average rate of taxation that applies to your total income. In mathematical terms, your effective rate details your tax liability for any given year.

Your effective tax rate shows what you actually paid in taxes across all marginal tax brackets, after you claim all credits and deductions. So while you may pay 25% in taxes on income between $37,650 – $91,150, you only pay 15% on income from $9,275 – $37,650. Your effective tax rate is usually lower than your marginal rate.

If you have any questions about what tax rate you can expect to be taxed at this year, please feel free to contact us today.