Reviewed by Ebony Howard
It may seem nuanced, but a taxpayer’s tax rate and their tax bracket are technically different. The tax rate may refer to the overall tax rate a taxpayer may face, while a tax bracket is simply the highest incremental tax rate they may face for a given amount of income. Let’s dig a little deeper into both.
Key Takeaways
- A tax bracket is a tax rate for a range of incomes, as shown on a table created by the IRS to indicate the total amount of income tax due from each taxpayer.
- There are three components of a tax bracket: filing status, tax rate, and income range.
- There are five filing statuses with different tax rates: single, married filing separately, married filing jointly, head of household, and qualifying widow/widower with dependent child.
Understanding Tax Brackets
The term tax brackets refer to the Internal Revenue Service (IRS) tables, issued each year, that indicate the dollar amount owed in taxes by every taxpayer whose income falls within the minimum to maximum income numbers. Each tax bracket corresponds to a tax rate.
There are three components of a tax bracket: filing status, tax rate, and income range. Tax rates are shown on the Y-axis and filing statuses are shown on the X-axis. The amount of income taxed at a specific rate for a specific income amount is found in the body of the tax bracket. Each of the seven tax rates applies to a specific level of income rather than applying to all of a taxpayer’s taxable income. Taxpayers use a tax bracket to determine what their taxes due are.
Important
The Internal Revenue Service (IRS) uses a progressive tax system, meaning that the more a taxpayer earns the higher the tax bracket.
Taxpayers pick which filing status is most appropriate to their situation, and calculate how much income is taxable after accounting for deductions and exemptions. There are five filing statuses: single, married filing separately, married filing jointly, head of household, and qualifying widow/widower with dependent child. There are also seven marginal income tax brackets, each assigned a different tax rate. The 2025 tax brackets are below:
Understanding Tax Rates
A tax rate is the percentage at which a particular tax is applied to income, property, goods, or transactions. Tax rates can vary significantly by country, region, and the specific type of tax— in this example, we’ll focus in on individual income tax rates.
Generally, the tax rate can be expressed in two ways: as a marginal rate or an effective rate. The marginal tax rate applies to the next dollar earned and shows how much of an additional dollar in income will go to taxes. For example, looking at the tax brackets above, the marginal tax rate for someone single earning $100,000 would be 22%. This means that if the person were to earn an additional dollar, that marginal increase in revenue (the $1) would be taxed at 22%.
Keep in mind that the marginal tax rate can quickly shift depending on someone’s specific income. For example, if you made $103,350 as a single taxpayer, your marginal tax rate is 22%. However, if you made just $1 more, you would change tax brackets, and only that extra $1 would be taxed at a 24% rate.
On the other hand, the effective tax rate represents the overall percentage of income paid in taxes after all deductions, credits, and exemptions are accounted for. The effective tax rate can provide a more comprehensive picture of the taxpayer’s total tax burden and is often lower than the marginal rate due to deductions and credits. For instance, if you earn $100,000 but only pay $12,000 of taxes due to favorable deductions, your effective tax rate would be 12% (which is going to be different than your highest marginal tax bracket).
Note
You may face a significant change (up or down) to your tax bracket when you get married and begin filing a joint return. This is because your income is aggregated with your spouse.
Importance of Understanding Tax Rates vs. Tax Brackets
It’s important for taxpayers to understand the difference between their tax bracket and their marginal or effective tax rate because each can impact financial planning in unique ways.
Knowing one’s tax bracket indicates the tax rate applied to income within a certain range, which helps taxpayers understand how additional income will be taxed. A taxpayer should know their tax bracket to understand how close they are to being taxed at a higher marginal rate.
The marginal tax rate—the rate applied to the next dollar earned—is essential for understanding the tax impact of income increases, like a raise or investment gain. For instance, if a taxpayer is in a high marginal bracket, they may want to be more cautious with strategies that generate additional taxable income, as this income will be taxed at the higher rate. It may make sense to prioritize tax-deferral strategies, in this case.
The effective tax rate, however, provides a more accurate picture of what percentage of income is actually paid in taxes after deductions, credits, and different tax rates on various types of income are applied. This rate is often lower than the marginal rate and can help taxpayers see their real tax burden. A taxpayer can use their effective tax rate to best understand the actual amount of cash expense they will face in an aggregate year for income tax.
What Is a Tax Rate?
A tax rate is the percentage applied to a taxable income, transaction, or asset value, determining the amount owed in taxes. It’s usually a single percentage applied to a specific dollar amount.
How Is My Tax Rate Determined?
For income taxes, your effective tax rate will depend on your total taxable income, minus any deductions and credits
What Is the Difference Between Marginal and Effective Tax Rates?
The marginal tax rate is the rate applied to your last dollar of income, essentially representing the tax on any additional income. The effective tax rate, on the other hand, is the average rate paid across all your income and considers deductions, credits, and lower marginal rates on initial income levels. Effective tax rates are generally lower than marginal rates and provide a clearer view of the actual tax burden.
What Is the Purpose of Tax Brackets?
Tax brackets enable a progressive tax system, where higher-income earners pay a larger percentage of their income in taxes. This system is designed to be fairer (which is subject to opinion), helping ensure those with higher earnings contribute more to funding government services, while lower earners face a lighter tax burden.
How Do I Know Which Tax Bracket I Fall Into?
Your tax bracket is based on your taxable income and filing status, like single, married filing jointly, or head of household. Each tax year, the IRS publishes updated tax brackets that outline income ranges and their corresponding rates. By totaling your annual income and applying any deductions, you can determine the bracket and rates that apply to you.
The Bottom Line
Tax rates determine the percentage of income, transactions, or assets that taxpayers owe to the government. Income tax brackets organize taxable income into ranges, where each range is taxed progressively higher in the United States.