A marginal tax rate is the percentage of tax applied to the last dollar of taxable income earned. It represents the rate at which a taxpayer’s next dollar of income will be taxed.
The U.S. federal income tax system is progressive, meaning income is taxed in brackets with different rates. As income increases, higher rates may apply—but only to the portion of income within each bracket.
✅ Key Points
- The marginal tax rate does not apply to all income—only to income within a specific bracket.
- It helps estimate the tax impact of additional income, such as:
- A raise
- A bonus
- Extra freelance or investment income
- It is different from the effective tax rate, which is the average rate paid on total income.
📌 Example
A taxpayer has $60,000 of taxable income.
- Their income spans multiple tax brackets.
- Their marginal tax rate is 22%, meaning:
- Only the portion of income above $47,150 (example threshold) is taxed at 22%.
- Income below that amount is taxed at lower rates (such as 10% and 12%).
If the taxpayer earns an additional $1,000, that income is taxed at 22%, resulting in an additional $220 in federal income tax.
🔍 Marginal vs. Effective Tax Rate
- Marginal Tax Rate:
The rate applied to the next dollar earned. - Effective Tax Rate:
Total tax divided by total taxable income (the average rate).
✅ A taxpayer can have a 22% marginal rate but a much lower effective rate.