Understanding Tax Brackets: How Marginal Rates Actually Work

The Biggest Tax Myth in America

Ask most people how tax brackets work and you will hear some version of this: "If I earn enough to move into the 24% bracket, all my income gets taxed at 24%." This is completely wrong, and this misconception costs people real money. Some turn down raises, bonuses, or side income because they believe earning more will somehow leave them with less after taxes.

The United States uses a progressive tax system with marginal rates. Only the income within each bracket is taxed at that bracket's rate. Your total tax is the sum of each layer, not one flat percentage applied to everything.

The 2025 Federal Tax Brackets

Single Filers

Married Filing Jointly

Note: These brackets apply to taxable income, which is your gross income minus the standard deduction (or itemized deductions) and any above-the-line adjustments.

A Detailed Example

Sarah is a single filer who earned $85,000 in 2025. After taking the standard deduction of $15,000, her taxable income is $70,000. Here is exactly how her federal income tax is calculated:

Layer 1: First $11,925 at 10% = $1,192.50

Layer 2: Next $36,550 ($11,926 to $48,475) at 12% = $4,386.00

Layer 3: Next $21,525 ($48,476 to $70,000) at 22% = $4,735.50

Total federal income tax: $10,314

Sarah's marginal rate is 22% because that is the rate on her last dollar of income. But her effective rate is only 14.7% ($10,314 divided by $70,000 in taxable income), or 12.1% of her total $85,000 gross income.

Why a Raise Never Hurts You

Suppose Sarah gets a $10,000 raise, bringing her gross income to $95,000 and her taxable income to $80,000. Only the additional $10,000 is taxed at 22%, adding $2,200 in federal tax. She keeps $7,800 of the raise after federal income tax.

There is no scenario in the US tax system where earning one more dollar of income results in less take-home pay due to marginal rates. The math simply does not work that way.

The only situation where effective rates can spike is when phaseouts reduce eligibility for certain credits. For example, the Earned Income Tax Credit phases out gradually, creating a hidden marginal rate increase for affected taxpayers. But these phaseout ranges are narrow and do not apply to most filers.

Marginal Rate vs Effective Rate vs Total Rate

Understanding these three numbers gives you a complete picture:

Marginal rate: The rate on your next dollar of income. This is the rate you see in the bracket tables. It matters for decisions about earning additional income or taking deductions.

Effective federal rate: Your total federal income tax divided by your taxable income. This is your true average federal tax rate.

Total effective rate: Your combined federal, state, local, Social Security, and Medicare taxes divided by your gross income. This is what you actually pay. For most Americans, it ranges from 20-35% depending on income level, state of residence, and deductions claimed.

Use our salary tax calculator to see all three rates for your specific income and filing status.

How Tax Brackets Interact with Deductions

Deductions reduce your taxable income, effectively removing income from your highest bracket first. A $1,000 deduction saves you $1,000 multiplied by your marginal rate.

If your marginal rate is 22%, a $1,000 deduction saves you $220.

If your marginal rate is 32%, the same $1,000 deduction saves you $320.

This is why tax planning is more valuable for higher-income taxpayers. The same deduction produces bigger savings at higher marginal rates.

How Tax Brackets Interact with Credits

Credits reduce your tax bill directly, regardless of your bracket. A $1,000 credit saves you exactly $1,000 whether your marginal rate is 10% or 37%. This makes credits more valuable dollar-for-dollar than deductions for most taxpayers.

Some credits are refundable, meaning they can reduce your tax below zero and generate a refund. Others are non-refundable and can only reduce your tax to zero.

State Tax Brackets Add Another Layer

Most states have their own income tax brackets on top of federal rates. Some states use a flat rate (such as Illinois at 4.95%), while others use progressive brackets similar to the federal system. Nine states have no income tax at all. See our state tax comparison for details.

When evaluating your total tax burden, combine federal and state rates. Someone in the 24% federal bracket living in California (top rate 13.3%) faces a combined marginal rate above 37% on additional income, not counting Social Security and Medicare.

Bracket Management Strategies

Income Timing

If you control when you receive income (common for freelancers and business owners), consider timing income to stay within a lower bracket. Deferring a large invoice from December to January shifts that income to the following tax year.

Retirement Contributions

Traditional 401(k) and IRA contributions reduce your taxable income, potentially keeping you in a lower bracket. A $23,500 contribution to a 401(k) saves between $2,820 (12% bracket) and $8,695 (37% bracket) in federal tax.

Roth Conversions

In years when your income is temporarily low, convert traditional retirement funds to Roth. You pay tax at your current low rate and enjoy tax-free withdrawals later. This is especially powerful in early retirement before Social Security and RMDs begin.

Capital Gains Timing

Long-term capital gains have their own preferential brackets. If your taxable income is below $48,350 (single) or $96,700 (married filing jointly), your long-term capital gains rate is 0%. Timing asset sales to stay within this threshold can eliminate capital gains tax entirely.

The Bottom Line

Tax brackets are layered, not flat. Your marginal rate only applies to income in that specific layer. Always evaluate tax decisions based on your marginal rate for additional income and your effective rate for your overall picture. Taxation.ai calculates all of this automatically and shows you exactly where each dollar of your income is being taxed.