As Bsch4477 mentioned, both tax rates are calculated differently. The marginal tax rate (tax bracket) is the tax paid for income that is in the highest bracket. You won't necessarily pay the marginal tax rate because there are many lawful ways to lower your tax. Just because your income falls within the limits of a marginal tax bracket, it doesn't mean you will pay that rate.
The effective tax rate is calculated by dividing the tax by the income. The income in the formula is based on adjusted gross income (AGI) from Form 1040, line 11. Sometimes the income can also include amounts if there are lump-sum retirement plan distributions or net unrealized appreciation in employer securities and specific options are chosen on Form 4972.
The tax starts with the amount on line 18 of Form 1040. It includes Alternative Minimum Tax, but it doesn't include some other taxes like the recapture tax. It includes tax if electing to report a child's income on Form 8814, as well as tax on lump-sum distributions on Form 4972. Self-employment taxes, additional taxes on retirement plans, and some other additional taxes aren't considered in the calculation. Finally, certain nonrefundable credits, such as the Child Tax Credit, Fuel Tax Credit, and refundable portions of other credits, are subtracted from the tax amount.
If refundable credits are larger than the tax, the effective tax rate can be negative. If income is zero or less, the effective tax rate is set to zero. For transferred tax data, prior years’ effective tax rates come from the 2023 tax return.
Some of the ways you can lower your tax rate are:
- Itemizing deductions
- Qualifying for some credits like Education Credits, or Child Tax Credit
- Having tax-free income and investments
You won't know what your total tax is until you have the information from Charles Schwab. One thing that is for sure is that based on the income amounts you shared, you will need to file a tax return. For more information see the below TurboTax help articles:
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