Marginal vs. Effective Tax Rate
The rate on your next dollar versus the average rate on all your income.
What is Marginal vs. Effective Tax Rate?
Federal income tax is progressive: each bracket's rate applies only to income within that bracket. The marginal rate - the rate on the next dollar - is what matters for decisions like tax-equivalent yield or the value of a deduction. The effective rate is total tax divided by total income, and is always lower for someone above the first bracket.
Marginal vs. Effective Tax Rate: a worked example
A client in the 32% bracket may pay an effective rate near 20%; a $1,000 deduction still saves $320.
More terms in Clients, Strategy & Tax
Sole Proprietorship
A business owned by one person with no legal separation from the owner.
General Partnership
Co-owners share management and unlimited liability; income passes through.
Limited Liability Company (LLC)
Limited liability for owners with pass-through taxation by default.
C Corporation
A separate taxpayer - profits taxed at the corporate level, then again as dividends.
S Corporation
A corporation that passes income through to shareholders, avoiding double tax.
Trust & Estate Accounts
Accounts run by a fiduciary - a trustee or an executor - under a governing document.
Foundations & Charities
Tax-exempt organizations investing for a mission, often in perpetuity.
Client Profile & Data Gathering
The financial and nonfinancial facts every recommendation must rest on.