What Is Your Marginal Tax Rate?
Marginal tax rate refers to the rate you pay on each additional dollar you earn. But how does it work, exactly?
April 18, 2022
This article is provided for informational purposes only and should not be construed as legal or tax advice. Always consult with a professional financial or tax advisor before making tax decisions.
The taxes we pay go towards funding infrastructure, military, social programs, public schools and much more. Although taxes are part of all of our lives, most of us don’t really understand them.
The tax code is complex, and there are a lot of buzzwords and phrases that you may not be familiar with. “Marginal tax rate” is one of them. What is marginal tax rate, and why is it relevant to you?
What is marginal tax rate?
The marginal tax rate is the rate of tax that will be paid on each additional dollar of earnings.
For example, if you’re in the 12% tax bracket, your marginal tax rate is 12%. This means each additional dollar you earn will be taxed at 12% ($0.12).
Marginal tax rates are relevant because the US federal government uses a progressive tax system. This means that the more you earn, the higher your marginal tax rate will be.
Everyone pays the same tax rate on the same levels of income based on tax brackets (see below). That means that a millionaire businesswoman pays the same 10% tax rate on the first ~$10,000 of income they earn as a teacher does on his first $10,000 of income.
However, marginal tax rates increase the higher your income gets. If the businesswoman earns $150,000 per year, for example, she will pay 24% in taxes on a large portion of her income.
Marginal vs. flat tax
Federal income taxes in the US are taxed on a marginal basis, which uses income tax brackets. This is known as a progressive tax system, because rates get progressively higher as income increases.
The alternative to this system is a flat tax. In this system, everyone is taxed the same percentage amount, regardless of income level. An individual earning $500,000 would pay 10%, and an individual earning $5,000 would also pay 10%.
A few states use a flat tax system, but most states (and the federal government) use a progressive system.
Tax brackets
To understand how marginal taxes work, it’s helpful to look at the tax brackets.
Tax Rate - Single Filers - Married Filing Jointly - Head of Household
10% - $0 to $10,275 - $0 to $20,550 - $0 to $14,650
12% - $10,275 to $41,775 - $20,550 to $83,550 - $14,650 to $55,900
22% - $41,775 to $89,075 - $83,550 to $178,150 - $55,900 to $89,050
24% - $89,075 to $170,050 - $178,150 to $340,100 - $89,050 to $170,050
32% - $170,050 to $215,950 - $340,100 to $431,900 - $170,050 to $215,950
35% - $215,950 to $539,900 - $431,900 to $647,850 - $215,950 to $539,900
37% - $539,900 or more - $647,850 or more - $539,900 or more
Source: TaxFoundation.org
Looking at this information, we can see that a single filer is taxed:
10% on income from $0 to $10,275
12% on income from $10,275 to $41,775
22% on income from $41,775 to $89,075
And so on
The progressive nature of tax brackets illustrates the key point of marginal tax rates: as income increases to a higher tax bracket, the income that falls in that bracket will be taxed at the new, higher rate.
You can think of tax brackets like buckets. Income that falls in the 10% “bucket” is taxed at 10%, income that falls in the 12% “bucket” is taxed at 12%, etc.
How to calculate marginal tax rate
Marginal tax rate is calculated by determining an individual’s current tax bracket. If their income lands in the 22% tax bracket, then their marginal tax rate is 22%.
Calculating total tax owed is a bit different. Here’s an example.
Marginal tax rate example
Elliott earns $70,000 per year and is a single filer for tax purposes. Elliott will pay:
10% of the first $10,275 earned ($1,027.50)
12% on the next $31,500 earned ($3,780)
22% on the remaining $28,225 earned ($6,209.50)
In tis case, Elliott’s marginal tax rate is 22%. If he gets a $1,000 bonus at work, that extra income will be taxed at 22%.
In total, Elliott will pay $11,017 in taxes on $70,000 of income. That means that his effective tax rate (average) is around 15.73%.
You can use this cheat sheet to quickly estimate your taxes owed and find your marginal tax rate, based on your current level of taxable income.
Single filers
Tax Rate - Taxable Income Bracket (annual income) - Tax Owed
10% - $0 to $10,275 - 10% of taxable income
12% - $10,275 to $41,775 - $1,027.50 + 12% of the amount of income over $10,275
22% - $41,775 to $89,075 - $4,807.50 + 22% of the amount of income over $41,775
24% - $89,076 to $170,050 - $15,213.50 + 24% of the amount of income over $89,075
32% - $170,051 to $215,950 - $34,647.50 + 32% of the amount of income over $170,050
35% - $215,951 to $539,900 - $49,335.50 + 35% of the amount over $215,950
37% - $539,901 or more - $162,718 + 37% of the amount over $539,900
Note: The above covers marginal tax rates for single filers. See this page for details for married couples and heads of household.
Why your marginal tax rate is important
Your marginal tax rate shows how much you’ll pay in taxes for any additional amount you earn. This can be helpful when considering a job offer or when weighing the tax effects of selling an investment.
Likewise, it shows how much you’ll save in taxes by reducing your taxable income. This can be helpful when doing retirement planning. If you know your marginal tax rate, you can quickly calculate how much you’ll save in taxes by contributing $1,000 to your 401(k), for example.
Earning more won’t cause a significant tax increase
There’s a misconception that if you get “bumped into a higher tax bracket,” you’ll end up losing money because you’ll pay so much in taxes.
The reality is that you’ll only pay the higher rate on the amount that is in the higher tax bracket.
Let’s say you earn $89,075 per year, putting you right at the top of the 22% tax bracket. If you get a $10,000 raise, you’ll now be in the 24% tax bracket. But only that additional $10,000 will be taxed at 24% — the rest of your income will not be affected.
Learn more about taxes
Now you can answer the question of “what is marginal tax rate.” Ready to learn more? Check out these other useful tax resources:
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