TRANSCRIPT:

Hi again everyone. Greg Vojtanek here of Fade In Financial. Today I want to talk a little bit about some language that you may not know the exact definitions of in the finance world. I may do multiple parts of this video series. But today I want to tell you about Marginal Tax Rate versus Effective Tax Rate. You may have heard of these.

Your Marginal Tax Rate is also known as, like, your tax buckets or your tax bracket. Currently, now this may change in the future, there are brackets of 10%, 12%, 22%, 24, 32, 35, 37. I’m not going to get hung up on those. But, basically, if you make up-to $100,000 (I’m rounding here), you’re going to be in the 22% bracket, or 22% Marginal Tax Rate, if you’re a single person.

That does not mean that your entire $100,000 will be taxed at 22%, because the Marginal Tax Rates are like this (I’m going to round here again): the first 11,000 is taxed at 10%. The next dollar over that, up-to $47,000, will be taxed at 12%. The next dollar after that, up-to $100,000, is going to be taxed at 22%.

That is what is known as your Marginal Tax Rate, or those are the tax brackets. It is a tiered system.

Compare that to your Effective Tax Rate, which basically means you’re going to take the average of all of those amounts. The 10%. How much was taxed at the 12%. How much was taxed at 22%. Then that’s your average. That is known as your Effective Tax Rate.

You’re paying what your Effective Tax Rate is, which is your average.

That’s it. I hope you found this helpful. I’ll probably be doing more of these in the future. Thanks for watching.