Marginal tax rate
Also called marginal rate
The tax rate applied to the next dollar of income, equal to the rate of the highest bracket a person’s taxable income reaches.
What it means
The marginal tax rate shows how much tax applies to an additional dollar earned, or how much is saved by an additional dollar deducted. Under a progressive system it is the rate of the top bracket a person’s income reaches, and it is usually higher than their average, or effective, rate.
It is the key figure for many money decisions: the value of a deduction, the benefit of a pre-tax retirement contribution, or the tax on a bonus. A full picture can include state income tax and payroll taxes, and benefits that phase out with income can raise the true marginal rate.
Formula
Marginal tax rate = Change in tax ÷ Change in taxable income
- Change in tax = additional tax owed
- Change in taxable income = the small increase in income that caused it
Example
Suppose a hypothetical system taxes the first $10,000 at 10% and income above that at 20%. A person with $50,000 of taxable income has a 20% marginal rate, so an extra $1,000 of income adds $200 of tax, and a $1,000 deduction saves $200.
How it’s used
- Valuing deductions and pre-tax contributions
- Choosing between Roth and traditional accounts
- Estimating tax on a raise or side income
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.