Marginal vs. Effective Tax Rates: A 2025 Guide for Self-Employed Professionals

As a real estate agent or self-employed professional, understanding marginal vs. effective tax rates is crucial for smart financial planning. More importantly, knowing how to lower your effective tax rate can help you keep more of your hard-earned income.

Marginal vs. Effective Tax Rate

Marginal Tax Rate

The marginal tax rate refers to the percentage applied to your next dollar of income. The U.S. tax system is progressive, meaning each portion of your income fills a "bucket" before moving to the next higher tax rate.

2025 Tax Brackets For Single Filers:

10%: $0 – $11,925

12%: $11,926 – $48,475

22%: $48,476 – $103,350

24%: $103,351 – $197,300

32%: $197,301 – $250,525

35%: $250,526 – $626,350

37%: $626,351+

2025 Tax Brackets For Married Filing Jointly:

10%: $0 – $23,850

12%: $23,851 – $96,950

22%: $96,951 – $206,700

24%: $206,701 – $394,600

32%: $394,601 – $501,050

35%: $501,051 – $750,700

37%: $750,701+

Effective Tax Rate

Your effective tax rate is the actual percentage of your income that you pay in taxes after deductions. It is based on your taxable income, which is calculated after subtracting either the standard deduction or itemized deductions from your total income.

For 2025, the standard deductions are:

$14,600 for Single filers

$29,200 for Married Filing Jointly

Example: How Marginal and Effective Tax Rates Work

Let’s say you’re a single filer earning $75,000:

Your taxable income after the $14,600 standard deduction is $60,400.

Your taxes are calculated progressively:

The first $11,925 is taxed at 10%

The next $36,550 ($48,475 - $11,925) is taxed at 12%

The remaining $11,925 ($60,400 - $48,475) is taxed at 22%

Your total tax bill comes out to about $8,000.

Your effective tax rate is: $8,000 ÷ $75,000 = 10.7%

Even though your marginal tax rate is 22%, your effective tax rate is much lower because of deductions and the progressive tax system.

4 Ways to Lower Your Effective Tax Rate

1. Maximize Deductions

Deductions lower your taxable income, reducing your overall tax burden:

• Home Office Deduction – Deduct a portion of rent/mortgage and utilities.
• Mileage & Business Expenses – Write off vehicle costs, software, and marketing expenses.
• Health Insurance – Self-employed individuals can deduct premiums.

2. Contribute to Tax-Advantaged Accounts

Saving for retirement reduces taxable income:

• SEP IRA – Deduct up to 25% of income or $69,000 (2024 limit).
• Solo 401(k) – Contribute as both employer and employee.
• HSA – If eligible, set aside pre-tax dollars for medical expenses.

3. Leverage Tax Credits

Unlike deductions, credits directly reduce your tax bill dollar-for-dollar:

• Child Tax Credit – Up to $2,000 per child (refundable up to $1,600).
• Earned Income Tax Credit (EITC) – Helps low-to-moderate-income earners.
• EV Tax Credit – Get up to $7,500 for purchasing a qualifying electric vehicle.

4. Strategic Income Planning

• Defer Income to Next Year – Delay commissions or bonuses to keep income in a lower bracket.
• Accelerate Expenses – Prepay deductible business costs before year-end to lower taxable income.

Final Thoughts

Your marginal tax rate determines how much tax you pay on new income, but your effective tax rate is what really affects your bottom line. By maximizing deductions, using tax-advantaged accounts, and planning strategically, you can lower your taxes and keep more of your earnings.

Need a tax strategy? Let’s connect and optimize your finances.