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Which tax rate should I use when deciding if a deduction is worth it, marginal or effective?

Always use your marginal rate for decisions about the next dollar. A deduction reduces income starting from the top of your stack, so a $1,000 deduction saves you your marginal rate times $1,000. If you are in the 22% bracket, that deduction is worth $220, not your lower effective rate times the amount. The same logic applies to a pre-tax 401(k) contribution or a traditional IRA deduction: value it at your marginal rate. Your effective rate is a backward-looking average that is useful for understanding your overall burden but misleading for forward-looking choices. This is a common mistake that leads people to undervalue tax-deferred savings. The IRS publishes current brackets each year so you can confirm your marginal rate before you decide.

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Educational disclaimer. Everything on WealthSerene.com is educational and is not investment advice. Projections and calculations are illustrative; actual results depend on market conditions, your situation and factors outside this tool’s scope. For a decision specific to your situation, consult a qualified financial professional. View full disclosures