What Is Your True Tax Rate?

Did you know that your top tax bracket rate is not your current total tax rate? And why not? Because ours is a progressive tax system. Accordingly, your effective tax rate is less than what you might think it is…and typically lower. Let's dive further into this mind-bogglingly fascinating subject!

Paying Uncle Sam

We make payments to Uncle Sam that are less than if all of our income was taxed at our marginal…highest… rate (e.g., the first slice of income is taxed at 10%, the next slice at 12%, and so on up to 37%).

By the way, the brackets are different for joint and single filers. It requires more income for joint filers to move from one bracket to the next. But the effective tax rate methodology is the same. And the effective, or average, tax rate will be lower than the marginal rate for both types of filers.

2017 Tax Cuts

The 2024 tax season is over for most of us. And, even though it's barely in the rearview mirror, it's time to talk about what our tax rate might be in the 2025 season. Congress may yet have a hand in what the rates will be depending on how they handle the 2017 tax cuts that are scheduled to expire at year-end.

The 2017 legislation kept the seven tax brackets that were in effect prior to 2017, but blissfully lowered five of the seven tax rates. If Congress allows the 2017 tax cuts to expire (shudder), rates will return to pre-2017 levels. Or if extended or revised. So, what particular tax rate did you pay under current law? The 2017 legislation widened the seven brackets, such that taxpayers could earn more money before finding themselves in the next higher tax bracket. And, finally, those seven brackets were subject to annual inflation adjustments.

High and Low Earners

As our Congress weighs in on extending the 2017 tax cuts, the dialogue includes the possibility of raising the top income tax rate (i.e., soaking the affluent a bit more). Hard to believe because IRS data from a year back shows that the top 1% of filers paid 40.4% of income tax revenue. And the top 10% covered 72%. That seems progressive enough for this old boy. By the way, at the other end of the tax ladder, the bottom 50%, combined, paid 3% of the income tax revenue, probably less tax revenue than its collection cost.

The lowest bracket (10%) rate takes effect at the first dollar of adjusted gross income, which is income after benefits - such as the standard or itemized deductions - are applied. According to the IRS, under current law about 90% of taxpayers take the standard deduction. Other taxpayers itemize when they have deductions like charitable outlays, mortgage interest, property taxes, medical expenses, etc. that exceed the standard deduction. Other factors that can reduce one’s tax liability include tax-deductible IRA contributions, a 20% small business owner deduction, children, long-term capital gains, etc.  

One’s tax liability is based on the net of gross income and these standard, itemized and other deductions. As taxable income moves up the seven bracket ladder, each increment gets taxed at the earlier mentioned progressively higher rate. In short, one’s marginal rate is the highest rate that applies to a given taxpayer – what he or she pays on their last dollar of income.

In any event, keep encouraging your legislators to extend the 2017 tax cuts indefinitely.

NOTE: For more information, check out the April 14, 2025 article by Ashlea Ebeling with informative graphics on this matter in the Wall Street Journal.