Marginal Tax Rate
The rate applied to your next dollar of income — the number that matters for almost every tax decision at the margin.
What Marginal Tax Rate means
Your marginal tax rate is the rate charged on the last dollar you earned. In a progressive system, income fills each bracket in turn, and the marginal rate is simply the rate of the highest bracket your income reaches.
It is not the rate you pay on your income as a whole. That is the effective rate — total tax divided by total income — and it is always lower, because the earlier brackets were taxed at their own lower rates. Conflating the two produces the persistent myth that a raise into a higher bracket can leave you with less money.
Marginal rate is the number to use whenever you are evaluating a change: what a deduction is actually worth, whether a traditional or Roth contribution wins, what a bonus will net, whether an extra shift is worth taking. Effective rate answers a different question — what this year cost overall.
Your real marginal rate is usually higher than the federal bracket alone. State income tax stacks on top, payroll taxes apply to earned income, and phase-outs of credits and deductions can add several points more as income rises through the phase-out range.
Long-term capital gains and qualified dividends run on a separate schedule with their own brackets, so an investor can face one marginal rate on wages and a materially lower one on investment income in the same year.
Example
In practice: In the 22% bracket, a $1,000 traditional 401(k) contribution cuts this year's federal tax by $220 — the same $1,000 saves only $120 for someone in the 12% bracket.
Related terms
Tax Bracket
An income range taxed at a particular rate — only the income inside that range is taxed at it, not your whole salary.
Standard Deduction
A flat amount subtracted from your income before tax is calculated, taken instead of itemizing individual deductions.
Gross Income
Your total pay before any taxes, benefits, or contributions are deducted — the figure lenders and tax rules start from.
Withholding
The income tax your employer deducts from each paycheck and sends to the government on your behalf during the year.
Capital Gains
The profit from selling an asset for more than you paid, taxed at a lower rate if you held it longer than a year.
Roth IRA
A retirement account funded with after-tax dollars where qualified withdrawals, including all growth, come out tax-free.
Run the numbers
Income Tax Calculator (Federal Brackets)
Estimate your U.S. federal income tax, marginal and effective rates, and take-home pay — with a bracket-by-bracket breakdown of how your income is taxed.
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