The tax system is complicated by the fact that different types of earnings are taxed differently—a policy consistent with the government's view that tax policy should encourage specific earning behaviors. To understand tax policies, there are three terms you should know: marginal tax rate, average tax rate, and effective marginal tax rate.

Your marginal tax rate is the percentage out of the last dollar that you earn that will go toward federal income taxes. This rate is important to know when you are calculating returns on various assets. Any new income will be taxed at this rate and any additional deductions will save taxes at this rate.

Your average tax rate is the average amount out of every dollar you earn that goes toward federal income taxes. This is your overall tax rate on income earned.

Finally, your effective marginal tax rate is the average amount out of every dollar you earn that is paid to all local, state, and federal income taxes.