What is a marginal tax rate?

Key takeaways

  • In the US, higher incomes are taxed federally at higher rates.
  • The marginal tax rate determines the percentage of taxes owed for each additional dollar that falls within progressing tiers of tax rates.
  • An effective tax rate is the percentage of your income owed to the IRS.

Maybe you've heard the more you earn, the more you get taxed. It's true. What's not true: that getting a raise could bump you into a new tax bracket and lead to you being taxed so much that your income is effectively lower than before. That's because not all of your income is subject to the same tax rate.

Here's a glimpse at the marginal tax rate and how it works to progressively tax brackets of income as they rise.

What is a marginal tax rate?

A marginal tax rate is the percentage at which your last dollar of taxable income is taxed. It's important to note it's not every dollar—just the last one. In a marginal tax rate system, other dollars are likely taxed at different rates. If that sounds confusing, let's break things down.

Marginal tax rates rely on tax brackets, or income ranges assigned to particular tax percentages. When you hear your tax bracket is a certain percentage, it can be easy to assume that means that your entire income is taxed at that rate.

But in a marginal tax rate system, your income is taxed differently depending on what you make each year. In a progressive marginal tax rate system, like the US uses, the first dollars you earn are very likely taxed at a lower rate than later ones, which means you're unlikely to actually pay the exact rate listed on your tax bracket for all of your dollars. We'll touch on how to calculate the amount you actually pay—your effective tax rate—later on.

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How do marginal tax rates work?

It can be hard to wrap your head around how marginal tax rates work, so let's think about your income as a pitcher of coins. Each tax bracket is a glass to be filled. You'd start by filling the glass representing the lowest income level, which is 10% in the US. Once it's full, you'd fill the next one (12%) and continue through glasses for the other tax brackets (22%, 24%, 32%, 35%, and 37%) until your pitcher was empty.

At the low end, for example, single filers for 2023 with $11,000 or less in total taxable income fall entirely within the 10% marginal tax rate bracket. So they pay 10% of their taxable income in taxes. But remember about adjustments and deductions—those can really add up. The standard deduction in 2023 is $13,850 for a single filer.

At the high end, a single filer in 2023 making more than $578,125 in taxable income has some income that falls into the 37% marginal tax rate bracket. But their entire taxable income is not taxed at 37%—just the portion above $578,125, which is the threshold for that highest tax-rate tier. Instead, that high-earner pays taxes on a portion of their income at the 10% rate, a portion at the 12%, and so on. In a marginal tax rate system, each dollar is only taxed for the bracket (or glass, in our above example) that it occupies.

Marginal tax rates for 2023

Trying to figure out what your marginal tax rate may be this year? The table below outlines the IRS marginal tax rates for 2023.

IRS marginal tax rates 2023

Rate Single filers Married couples filing jointly Head of household
10% $0 to $11,000 $0 to $22,000 $0 to $15,700
12% over $11,000 to $44,725 over $22,000 to $89,450 over $15,700 to $59,850
22% over $44,725 to $95,375 over $89,450 to $190,750 over $59,850 to $95,350
24% over $95,375 to $182,100 over $190,750 to $364,200 over $95,350 to $182,100
32% over $182,100 to $231,250 over $364,200 to $462,500 over $182,100 to $231,250
35% over $231,250 to $578,125 over $462,500 to $693,750 over $231,250 to $578,100
37% over $578,125 over $693,750 over $578,100

How to calculate a marginal tax rate

Using the 2023 marginal tax rates for a single filer, let's look at a hypothetical example marginal tax rate calculation. Let's say a single filer had a 2023 taxable income of $115,000. To get their marginal tax rate, take the percentage from the progressive scale from dollars earned within each bracket. For our example earner, that equates to:

Tax rate Taxable income Taxes owed per bracket (bracket's taxable income × bracket's tax rate)
10% $0 to $11,000 $1,100 ($11,000 × 0.10)
12% over $11,000 to $44,725 $4,047 ($33,725 × 0.12)
22% over $44,725 to $95,375 $11,143 ($50,650 × 0.22)
24% over $95,375 to $115,000 (stopped at our filer's income) $4,710 ($19,625 × 0.24)
Total taxes owed $21,000.00
For illustrative and educational purposes only.

Even though our example filer's top income fell in the 24% tax bracket, the progressive nature of US tax percentages means they didn't owe a flat 24% of their entire taxable income. That tax bill would be higher at $27,600. Instead, they owed $21,000—or $6,600 less—because of the marginal tax rate.

Marginal tax vs. flat tax

A flat tax rate means that all taxpayers pay the same percentage of their income, no matter how much they earn. So someone earning $50,000 would pay the same percentage of their income as someone earning $500,000.

Marginal tax rates, meanwhile, are progressive, meaning a different percentage may be applied to each dollar as your income grows. In the US system, someone earning $50,000 would find themselves in the 22% tax bracket while someone earning $500,000 would be in the 35% tax bracket.

Translation: In the US, taxable income is taxed federally on a progressive scale, meaning that higher incomes are taxed at higher rates.

Marginal vs. effective tax rate

Remember: Your marginal tax rate only applies to that last dollar you earn. If you're interested in the rate you're actually paying in taxes, you'll need to find out your effective tax rate.

An effective tax rate, aka the average amount you pay on each dollar, is the percentage of your total income owed to the IRS. To get that number, divide the amount you pay in taxes by your gross annual income.

Using our hypothetical example single filer, you can calculate their effective tax rate by dividing their total taxes owed, $21,000.00, by $115,000—which we'll say is their total income for this example—and multiply by 100 to get an effective tax rate of 18.3%. That tax rate is noticeably lower than their 24% marginal tax rate, because their income was taxed on a progressive scale, from 10% to 24%.

Ways to reduce your marginal tax rate

Tax deductions can reduce your taxable income, which potentially reduces your marginal tax rate and your total income tax owed. For example, in 2023, all single filing taxpayers were allowed a $13,850 standard deduction. But it's possible they could have reduced their taxable income more if, instead of taking the standard deduction, they itemized—individually listing out deductions such as mortgage or loan interest and qualified charitable contributions. Or they could have reduced their taxable income by contributing to a 401(k) account or another tax-advantaged retirement account.

Returning to our hypothetical example single filer, let's say itemizable deductions and pre-tax contributions to tax-advantaged retirement accounts reduced their total taxable income from $115,000 to $95,000. Although part of their taxable income still fell within the 24% tax bracket, their total taxes owed dropped a few hundred dollars, from $21,000 to $16,207.50.

Tax rate Taxable income Taxes owed per bracket (bracket's taxable Income × bracket's tax rate)
10% $0 to $11,000 $1,100 ($11,000 × 0.10)
12% over $11,000 to $44,725 $4,047 ($33,725 × 0.12)
22% over $44,725 to $95,375 (but stopped at $95,000 to reflect the taxable income in the example) $11,060.50 ($50,275 x 0.22)
For illustrative and educational purposes only.

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