It can be confusing to understand the difference between your average tax rate paid on all your income versus your marginal tax rate, which represents what you'd pay on a small increase in income. Neither of them is explicitly printed on your tax return, but you can figure them both out as you do your taxes.
A marginal tax rate is the amount of tax you'd pay on the next dollar of income and it's what people generally refer to when they talk about federal tax brackets. Your overall, or average, tax rate refers to the percentage of your income you spend on taxes.
Finding Your Average Income Tax Rate and Marginal Tax Rate
When you fill out Internal Revenue Service Form 1040 or another tax form, your average tax rate or marginal tax rate isn't an entry on the form, though some online tax software may display these rates. Still, you can use the information you include on the IRS forms to compute these rates.
To compute the effective tax rate for an individual or family, also known as the average income tax rate, you want to divide the income total tax you pay by your total taxable income. For example, if you made $100,000 in taxable income and paid $25,000 in taxes, you'd say your average tax rate was 25 percent. Depending on what you're trying to calculate, you could use only your federal taxes paid, only your state taxes or the sum of the two to compute your average federal tax rate, average state tax rate or total average tax rate, but the principal is the same.
On the other hand, you can find your federal marginal tax rate by looking at the federal tax brackets. To find your state marginal tax rate, you'd use the tax brackets for your particular state. Simply look up your taxable income in a table of tax brackets and find which bracket an additional dollar of income would fall into and what the rate is. For example, if you made $300,000 and income between $200,000 and $500,000 is taxed at 35 percent, an additional dollar would be charged at that rate, so your marginal tax rate is 35 percent.
Capital Gains and Other Special Cases
When you talk about your marginal income tax rate, that's usually for ordinary income, from salaries, tips and bank interest. Other sources of income may be taxed at a different rate.
For example, long-term capital gains, the amount you gain when you sell holdings like stocks or real estate that you've held for over a year, are taxed at different marginal rates of 0 percent, 15 percent or 20 percent, depending on your total income. Certain income from self-employment is also subject to self-employment tax to cover Medicare and Social Security tax, so it's effectively taxed at a higher marginal rate than income from work for an employer.
2018 Tax Rates
Among other changes under the Tax Cuts and Jobs Act, a new set of federal tax brackets go into effect in the 2018 tax year.
For single people, ordinary income is taxed at a 10 percent marginal rate up to $9,525, then a 12 percent rate up to $38,700, then a 22 percent rate up to $82,500, then a 24 percent rate up to $157,500, then a 32 percent rate up to $200,000, then a 35 percent rate up to $500,000 and a 37 percent rate above that. The thresholds are higher for married couples filing jointly, though the marginal rate brackets are the same.
2017 Tax Rates
For the 2017 tax year, marginal tax rates were also based on seven federal tax brackets, though taxes were generally higher at any particular income point than in 2018.
For single people, income up to $9,325 is taxed at a 10 percent marginal rate, then income up to $37,950 is taxed at 15 percent, then at 25 percent up to $91,900, then at 28 percent up to $191,650, then at 33 percent up to $416,700 and at 39.6 percent beyond that point.
Generally, both marginal tax rates and average income tax will be higher at most annual gross incomes in 2017 than in 2018.
- Center on Budget and Policy Priorities: Basics: Marginal and Average Tax Rates
- Internal Revenue Service: Publication 550 - Investment Income and Expenses
- SimpleTax: Average and Marginal Tax Rates
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
- IRS: Self-Employment Tax (Social Security and Medicare Taxes)
- NerdWallet: 2018 Capital Gains Tax Rates — and How to Avoid a Big Bill
- tax forms image by Chad McDermott from Fotolia.com