Marginal vs effective tax rate

“I turned down the overtime. It would have pushed me into the next bracket and I’d have taken home less.”

This is the most durable misconception in personal finance, and it costs people real money in refused overtime, declined raises and mistimed bonuses.

That is not how the tax system works. Earning more never reduces your take-home pay through the bracket mechanism. This guide shows why, and what the numbers mean.

Brackets are floors, not switches

The United States uses a progressive marginal system. The word marginal is doing all the work: a bracket rate applies only to the income within that bracket, not to your whole income.

Think of it as pouring water into a series of buckets. The first bucket fills at 10%. Once it is full, the overflow goes into a 12% bucket. Once that is full, the overflow goes into a 22% bucket. Filling a new bucket never changes what happened in the ones below it.

For a single filer in tax year 2026:

These brackets apply to taxable income, which is what remains after the standard deduction of $16,100 for a single filer. A $60,000 salary is $43,900 of taxable income, so that person’s top bracket is 12%, not 22%.

The arithmetic that settles it

Take a single filer with $70,000 of taxable income, right in the 22% bracket.

• First $12,400 at 10% = $1,240
• Next $38,000 (from 12,400 to 50,400) at 12% = $4,560
• Next $19,600 (from 50,400 to 70,000) at 22% = $4,312
• Total: $10,112

Their marginal rate is 22%, which is what the next dollar is taxed at. Their effective rate is 14.4% ($10,112 divided by $70,000). Both numbers are correct, and they measure different things.

Now give them a $1,000 raise to $71,000. Only the new $1,000 falls in the 22% bracket, so it costs $220 in federal tax. They keep $780.

They are better off by $780. There is no bracket threshold anywhere in the system at which an extra dollar of income leaves you with less money.

Which rate to use, and when

Your marginal rate answers “what happens to the next dollar?” Use it for any decision at the margin:

• Should I take the overtime? Multiply by (1 − marginal rate).
• What does a $5,000 raise actually add? Same.
• What does a pre-tax 401(k) contribution save me? It saves at your marginal rate, since a dollar contributed comes off the top of your income, where the highest rate applies. This is why pre-tax contributions are worth more to high earners.
• Is a traditional or Roth contribution better? That compares your marginal rate now against your expected marginal rate in retirement.

Your effective rate answers “what did all of this cost?” Use it for budgeting, for comparing years, and for arguing with someone who says they “pay 40% in tax”. Almost nobody’s effective federal rate is close to their top bracket.

The two are always different, and for anyone above the first bracket the effective rate is the lower one.

Where the myth comes from

It persists for reasons that are not entirely silly.

Withholding on a bonus looks punitive. A bonus is withheld at a flat 22% supplemental rate and not at your normal rate, so the deposit looks disproportionately small. That is withholding, not tax, and it settles at filing. The bonus guide covers this properly.

Benefit cliffs are real. Some means-tested programmes, such as certain subsidies and some credits, phase out abruptly at an income threshold, and crossing one can leave a household worse off. They matter, but they are eligibility cliffs in benefit programmes and not income tax brackets. The two get conflated constantly.

A raise can change your withholding pattern. Payroll systems project your annual income from the current pay period. A large one-off can cause over-withholding for a period, which looks like a punishment and is a timing artefact.

Some deductions and credits phase out as income rises, which raises your effective marginal rate above the headline bracket. Your true marginal rate can then exceed the bracket rate. It still doesn’t produce a net loss from earning more.

Payroll tax works differently, and in your favour

This is the one place the rate genuinely falls as you earn more.

Social Security is 6.2% of wages, but only up to a wage base of $184,500 in 2026. Above that, nothing. Medicare is 1.45% with no cap, plus an extra 0.9% on wages above $200,000.

So a high earner’s payroll tax rate drops partway through the year when they cross the Social Security wage base. Their combined effective rate is not a smooth curve.

Summary

Your marginal rate is what the next dollar costs. Your effective rate is what all your dollars cost, and it is always lower. Crossing into a higher bracket means only that new income is taxed more, never that you take home less.

Take the raise. Take the overtime.

Run your own numbers on the paycheck calculator, which shows both rates, and see where the bracket figures come from.