Marginal Tax Rates Explained

The plain answer

Your marginal tax rate is the rate that applies to your next dollar of taxable income. It is not the rate applied to all of your income.

Crossing into a higher tax bracket only exposes the taxable income inside that bracket to the higher rate. Income in the earlier brackets keeps its earlier rates.

How it actually works

Tax brackets work in layers. Each layer covers a range of taxable income and has its own rate. Your total income tax is the sum of the tax calculated in every layer you reach.

For a single filer, the lowest ordinary rate is 10%. Later layers use higher rates on only the income inside those layers.

Your marginal rate can help estimate the federal income tax effect of a small change in taxable income. If a deductible expense reduces taxable income while you are in a particular bracket, the income tax savings may be roughly that expense multiplied by the marginal rate. Eligibility rules, phaseouts, payroll taxes, and state taxes can change the result.

A deduction still leaves you paying most of the underlying cost. Do not spend a dollar to save thirty cents in taxes.

What this means for you

A raise generally still leaves you with more after-tax income. Only the portion that reaches a higher bracket faces that higher rate.

Use your marginal rate for decisions involving the next amount earned or deducted. Use your effective rate when you want the average share of income paid in income tax.

Common mistakes

• Applying the highest bracket reached to every dollar of income.
• Turning down additional income solely to avoid a higher bracket.
• Using a marginal rate as if it were an effective rate.
• Assuming a deduction returns the full amount spent.
• Forgetting that taxable income differs from salary or gross income.

Related pages

• How Taxes Actually Work
• How Tax Brackets Work
• Your Effective Tax Rate