Marginal vs. Average Tax Rate

This video clears up a common misconception about how U.S. federal income tax brackets work, showing why moving into a higher tax bracket never reduces your take-home pay. Key terms covered:

• Average tax rate — Total tax paid divided by total income; the overall percentage of your income that goes to federal tax.
• Marginal tax rate — The tax rate applied only to the portion of income that falls within a specific tax bracket, not to your entire income.
• Tax bracket — A range of income taxed at a specific marginal rate; the U.S. uses multiple brackets, with rates rising for higher slices of income.

Example used in the video: A hypothetical taxpayer, Bob, earns $105,000 and mistakenly believes his entire income is taxed at his top bracket's rate, so that he could actually have less after-tax income if he got a raise to $106,000, just over the threshold of the next tax bracket. The video walks through the 2026 U.S. tax brackets to show that only each portion of income above a bracket's threshold is taxed at that bracket's rate–and that earning more (or getting a raise) always increases take-home pay.