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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 300
Experience:  Former IRS Revenue Agent
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Can you please explain marginal tax rate vs effective tax

Customer Question

Can you please explain marginal tax rate vs effective tax rate as easily as possible?
Submitted: 2 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

This is how I explain to my clients when I overview their federal tax returns with them. The software prints out the two rates on the cover page.

Marginal tax rate is your highest tax bracket. Your highest tax bracket is 25% -- e.g.

However, your effective tax rate is 11.5%, e.g., which means that for every dollar of income you report on this tax return, you pay 11.5 cents to the federal government.

Marginal tax rate is the highest tax bracket. The effective tax rate is the actual tax rate. If we use the total tax amount to divide into the adjusted gross income, depending on the software, I think you will see that is the effective tax rate. When a person has self employment tax, the effective rate sometimes will be higher than the marginal tax rate because the later is for income tax only.


Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP