Income Tax

Income tax is the starting point for understanding your full tax picture — and the most widely misunderstood aspect of it is the difference between marginal and effective rates. The marginal rate is the rate you pay on your last dollar of income. The effective rate is what you actually pay as a percentage of your total income. A household in the 37% federal marginal bracket almost never pays 37% on all their income — the progressive rate structure means lower rates apply to the first dollars of income, and the effective federal rate for most high earners falls in the 25–32% range.

The 2024 federal brackets for married filing jointly: 10% on income up to $23,200; 12% up to $94,300; 22% up to $201,050; 24% up to $383,900; 32% up to $487,450; 35% up to $731,200; and 37% on income above $731,200. For a household with $500,000 in W-2 income, the federal income tax before any deductions is approximately $139,000, representing a 27.8% effective rate. The standard deduction ($29,200 for MFJ in 2024) or itemized deductions will reduce that further.

Above $200,000 (single) or $250,000 (MFJ), two additional taxes apply. The Net Investment Income Tax (NIIT) adds 3.8% to investment income (dividends, capital gains, rental income, passive income). The Additional Medicare Tax adds 0.9% to earned income. Combined with the base Medicare tax of 1.45% each, high earners effectively pay 2.35% in Medicare taxes on wages above the threshold — which, combined with state income taxes, pushes the marginal effective rate on top-bracket earned income well above 50% in high-tax states like California and New York.

The strategies that reduce federal taxable income — retirement contributions, HSA contributions, business deductions — are covered in deductions. How state income taxes stack on top is detailed in state taxes. And for what income tax means for your actual paycheck, see take-home pay. The Tax & Wealth pillar covers the complete picture of tax strategy for high earners.