In more detail
In a bracket system each slice of income is taxed at its own rate, so moving into a higher bracket taxes only the income above the threshold at the higher rate; earning more never reduces your take-home pay through the brackets alone. The effective (average) rate is total tax divided by total income and is always below the top marginal rate. Deductions save tax at your marginal rate, while credits reduce the tax itself. Phase-outs of benefits or credits can make the true marginal rate higher than the bracket rate.
Why it matters
The marginal rate is the one to use for decisions about extra work, a raise, a deduction or a traditional versus Roth retirement contribution. The fear of "moving into a higher bracket" usually comes from confusing the two rates.
Example
With example brackets of 10% up to $10,000, 20% from $10,000 to $40,000 and 30% above $40,000, income of $60,000 pays:
| Slice | Rate | Tax |
|---|---|---|
| $0–$10,000 | 10% | $1,000 |
| $10,000–$40,000 | 20% | $6,000 |
| $40,000–$60,000 | 30% | $6,000 |
| Total | $13,000 |
The effective rate is 21.67%, the marginal rate 30%: the next $1,000 earned costs $300 in tax, and a $1,000 deduction saves $300.