Understanding How Marginal Tax Brackets Work

How marginal tax brackets work, why your effective rate is always lower than your top bracket, and how to calculate your actual tax bill.

One of the most common misconceptions about income taxes is that earning more money can push all of your income into a higher bracket. In reality, the US (and Canadian) federal tax system uses marginal brackets — each bracket rate applies only to the portion of income that falls within that range.

For example, in 2025 the first $11,925 of taxable income is taxed at 10%, the next portion up to $48,475 is taxed at 12%, and so on up through the 37% bracket that applies only to income above $626,350. If you earn $100,000, only the dollars between $48,475 and $100,000 are taxed at the 22% rate — not your entire income.

This is why your effective tax rate — total tax divided by total income — is always lower than your top marginal rate. Someone in the 22% bracket with $100,000 of income typically has an effective federal rate closer to 15-17%, depending on deductions.

The same marginal principle applies at the state level, though some states use flat rates (a single bracket) while others have progressive brackets similar to the federal system. States like California have many brackets with a top rate above 13%, while states like Texas and Florida have no income tax at all.

Capital gains are taxed under a separate bracket schedule at the federal level. Long-term capital gains (assets held over one year) benefit from preferential rates of 0%, 15%, or 20% depending on your total taxable income. Short-term gains are taxed as ordinary income.

To see exactly how brackets apply to your income, try the TaxMath calculator. Select multiple states to compare effective rates side by side, and toggle the standard deduction to see how it shifts your taxable income down into lower brackets.