SoFi

When it comes to figuring out how much you’ll owe the Internal Revenue Service (IRS), it helps to understand the difference between marginal and effective tax rates. The marginal tax rate is the tax rate applied to the portion of your income in the highest tax bracket. The effective tax rate is the average tax rate applied to your total income.

Knowing how to calculate your marginal vs. effective tax rate can give you perspective on how much you’re paying in taxes. You can also use the comparison between the two to look for opportunities to maximize tax savings.

Marginal vs Effective Tax Rate: What’s the Difference?

Comparing effective vs. marginal tax rate can be a useful way to see what you’re paying in taxes compared to how you’re being taxed. In terms of the key differences, here are some of the most important things to know when assessing marginal tax rate vs. effective tax rate.

•   Purpose: Marginal tax rates determine the tax rate that you’re subject to, based on your income. Your effective tax rate reflects the percentage of income you pay in taxes.

•   Calculation: Your marginal tax rate is calculated by applying the appropriate tax rate to each level of income you have. Effective tax rates are calculated by dividing your tax liability by your taxable income.

•   Range: Marginal tax rates range from 10% to 37%. There is no upper or lower limit for effective tax rates; they’re typically lower than marginal tax rates.

•   Application: Your marginal tax rate tells you the tax rate on your last dollar of income. The effective tax rate lets you see what share of your annual income you actually pay in taxes.

What Is a Marginal Tax Rate?

The marginal tax rate is the amount of tax that applies to each additional dollar of income earned. The higher your income, generally the higher your marginal tax rate will be.

The U.S. uses a progressive tax system in which your tax rate increases as your taxable income increases. Taxable income is the amount of income subject to tax, after deductions and exemptions are factored in. Your marginal tax rate corresponds to your tax bracket, which is determined by your income and your filing status.

As of 2025, there are seven tax brackets, ranging from 10% at the lowest end to 37% at the highest. Marginal tax rates increase once you cross certain income thresholds. A difference of just one dollar can put you in a higher marginal tax bracket. However, only that last dollar will be taxed at that higher rate.

How Does Marginal Tax Rate Work?

Marginal tax rates work by determining which tax rate applies at various income levels. As mentioned, they’re based on taxable income only. The more tax credits and tax deductions you’re able to claim, the more you can reduce your taxable income for the year.

When you file your tax return, your taxable income is what determines which marginal tax rates you pay. Different marginal tax rates apply for each tier of income you have across different tax brackets.

If you’re wondering what tax bracket you’re in, here’s how marginal tax rates add up for tax year 2024 (filed in 2025) and tax year 2025 (filed in 2026).

Calculating Marginal Tax Rates

Calculating marginal tax rates is a simple process that requires you to do two things.

•   Calculate your total taxable income for the year

•   Apply the appropriate marginal income tax rates to each level of taxable income

For example, say that you and your spouse had a gross income of $100,000 and a taxable income of $70,800 in 2024 and file jointly.

Here’s how your marginal tax rates would apply: 10% on your earnings up to $23,200 and 12% on the rest of your earnings.

•  $23,200 x 0.10 = $2,320

•  $47,600 x 0.12 = $5,712

In this example, you’d be subject to two marginal tax rates: 10% and 12%. Your total tax owed based on the marginal tax rate calculation would be $8,032. The higher your income, the more tax rates you’d be subject to.

What Is an Effective Tax Rate?

The effective tax rate, also referred to as average tax rate, is the total tax paid divided by taxable income. Average tax rates tell you how much of your income you paid in taxes overall.

Your effective tax rate includes federal taxes but typically excludes other taxes you pay, such as:

•   State and local income taxes

•   Sales taxes

•   Property taxes

Compared to marginal tax rates, determining your effective tax rate can be a simpler calculation. Average tax rates are usually lower than marginal tax rates due to the way each one is determined.

How Does Effective Tax Rate Work?

Effective tax rates tell you what percentage of your income you paid in taxes, after deductions are taken out. By looking at the average rate your income was taxed at, the effective tax rate is a more accurate representation of your overall tax liability than your marginal tax rate.

There’s no standardized chart that breaks down effective tax rates. They’re different for every person, since they’re dependent on your income, the deductions and exemptions you claim, and the amount of tax you pay based on your marginal tax rate.

You can, however, compare your effective tax rate vs. marginal tax rate by calculating your effective tax rate (details on that below) and comparing it to your marginal tax rate (the highest tax bracket your income falls into) to get a sense of how they differ. Again, you will likely see that even though you may be in a higher tax bracket, the actual percentage of income you pay in taxes is a lower number.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

Calculating Effective Tax Rates

Determining your effective tax rate is a fairly simple calculation. It requires you to know two things:

•   Your annual income

•   Your federal tax liability

To get your effective tax rate, you’d divide your federal taxes paid by your taxable income, then multiple that number by 100. Again, this is income after deductions which reduce your taxable income.

Going back to the previous example, a married couple had a taxable income of $70,800 and paid $8,032 in taxes for the year. If you divide the $8,032 they paid in taxes by their $70,800 in taxable income, then multiply that number by 100, you’ll see that their effective tax rate works out to be 11.34%.

Tips for Paying Your Taxes

Knowing how to prepare for tax season can make the process of filing your return easier. Here are a few tips that can help you get ready for tax filing with less stress.

•   Get organized. Keeping track of receipts, paystubs, and other forms means you’ll have everything you need to file once tax season begins. Starting the process early can prevent a potentially anxiety-provoking rush to figure out what is a W-2 and whether you received the 1099s you need to complete your return.

•   Track income. If you’re self-employed or have a side hustle, it’s a good idea to keep your own records for income even if you expect to get one or more IRS Form 1099.

•   File early. Filing early can help you get your refund faster if you’re owed one since you’re beating the rush.

•   Get help if you need it. If you need tax season help, tax filing software programs can make putting your return together easier. Or you might want to work with a professional tax preparer.

If you’re looking for free or low-cost options, you can find a list of resources at the IRS website.

•   Choose direct deposit. If you’re getting money back when you file, direct deposit can be the fastest way to get paid. For example, a refund from an electronically filed return could be with you in less than three weeks.

The Takeaway

Understanding the difference between marginal tax rate vs. effective tax rate can give you perspective on where your hard-earned dollars go. Marginal tax rates show you the different percentages of taxes you may pay on your income, while your effective tax rate tells you your overall tax rate.

If you are due a refund and need a great place to deposit it, you may want to make sure your bank account offers minimal or zero account fees and a competitive rate.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Between marginal and effective tax rates, which one is higher?

Marginal tax rates are usually higher than effective tax rates. Your marginal tax rate refers to the rate you pay on the top portion of your income. It’s the highest rate you pay, but typically doesn’t apply to all of your income. Your effective tax rate, on the other hand, is the average rate you pay on all your income.

How can I lower my effective tax rate?

Claiming more deductions can lower your effective tax rate. For example, if you normally claim the standard deduction, you might consider how you could reduce your taxable income by itemizing things like charitable contributions or interest paid on a mortgage loan.

What does it mean if the effective tax rate is negative?

A negative effective tax rate can mean that you qualify for refundable tax credits, such as the Earned Income Tax Credit or Child Tax Credit, that add up to more than what you owe in taxes. Keep in mind that you must file a tax return to claim refundable tax credits.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOBNK-Q424-109