As illustrated in the chart above, more than 42 million households in the United States are in the 15% tax bracket, making it the most common one. This means that for every extra dollar of salary they earn, they pay 15 cents in income taxes; however, their overall tax rate is usually much lower. Tax brackets are not as straightforward as they seem because most taxpayers have to look at more than one bracket to find out their effective tax rate. This implies that, whatever tax bracket you're in, your rate won't apply to all of your income unless your taxable income ends up in the lowest category.
Instead, you pay the lowest tax rate up to the limit of the lowest tax bracket, then the next lowest tax rate up to your limit, and so on until you reach your total taxable income. However, long-term capital gains brackets are configured so that you generally pay taxes at a lower rate than if ordinary tax rates and brackets were applied. If you hold an equity asset for one year or less, any gain from the sale is considered a short-term capital gain and is taxed at the ordinary income rates listed above. Knowing your tax bracket and your effective tax rate can be the first steps to reducing your taxable income and reducing your taxes.
Therefore, starting in 2026, tax rates are expected to return to previous rates, which were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The simplest way to calculate your marginal tax rate is to look at the federal tax categories and see what category your taxable income ends up in. In the United States, the Internal Revenue Service (IRS) uses a progressive tax system, which means that it uses a marginal tax rate, which is the tax rate paid on an additional dollar of income. The four original reporting states were single, married filing jointly, married filing separately, and head of household, although the rates were the same regardless of tax status.
Rather than analyzing what tax bracket you fall into based on your income, determine how many individual tax brackets you overlap based on your gross income. The technical definition of a marginal tax rate would be the rate that each individual taxpayer pays on their additional income dollars. Long-term capital gains, on the other hand, are taxed at a rate between 0% and 20%, depending on your income level. When determining what tax category you fall into, look at the highest tax rate that applies to the top of your taxable income for your filing status.
This is often equivalent to Americans being charged a rate lower than their individual federal income tax bracket, known as the effective tax rate. A tax rate is a percentage at which income is taxed, while each tax category is a range of income with a different tax rate, such as 10%, 12%, or 22%, known as the marginal rate.