Looking at your tax return might leave you wondering why your blended tax rate is so high, 37% in some cases. This is a common misunderstanding since a lot of taxpayers aren’t aware of how tax brackets and blended rates work. This does not mean you are paying 37% of your income in tax, it does mean a portion of your income is at the highest federal tax bracket. Here’s why this occurs.
Understanding the Blended Tax Rate
Your blended tax rate, or effective tax rate, shows the average percentage of all your income that you pay in taxes. This is different from your marginal tax rate, which is the tax rate on the last dollar you earned.
Take, for example, the tax brackets for single filers in 2025. Tax rates are set between 10% to 37% for different income levels. Just because your taxable income reaches the 37% tax bracket, that doesn’t mean all your income is taxed at 37%. Income tax is charged progressively; some of your income is taxed at lower rates, and the remaining is charged at the highest rate.
Your “blended” tax rate can also reach 37% when you take into account state income taxes, self-employment taxes, and capital gains taxes. This is why it is referred to your overall blended tax rate.
Reasons Your Blended Rate Might Be 37%
- You’re in the Top Federal Tax Bracket
For 2025, the 37% marginal rate applies to:- Single filers: Over $609,350
- Married filing jointly: Over $731,200
- Head of household: Over $609,350
- If your income exceeds these thresholds, part of your earnings is taxed at the top 37% federal rate.
- You Have Additional Investment Income: The 3.8% Net Investment Income Tax (NIIT) applies if your modified adjusted gross income (MAGI) exceeds $200,000 (single) or $250,000 (married). This surcharge can make your effective rate seem higher.
- State Taxes Add to the Total: High-tax states like California or New York can add up to 10% or more on top of your federal rate, pushing your overall blended rate closer to 37%.
- You Have Limited Deductions or High Alternative Minimum Tax (AMT): Losing deductions due to income limits or triggering AMT can increase your effective tax percentage.
Key Takeaway
A 37% blended tax rate doesn’t mean every dollar you earn is taxed that high—it means your top income portion faces the 37% bracket and your average tax load is elevated by other factors. To lower it, consider tax-loss harvesting, retirement contributions, or strategic income deferral to reduce your taxable income.
Find your true effective rate and how to lower it: schedule a consultation with Dimov Tax today.