Tax Glossary
Key Tax TermMarginal Tax Rate
Your marginal tax rate is the rate at which your next dollar of income is taxed. It is NOT the rate you pay on all your income. Marginal tax rates come from the IRS tax brackets and are a core part of how the progressive tax system works.
💡Simple definition
Your marginal tax rate is the percentage taken out of your next dollar of taxable income. It represents the "top bracket" you fall into.
⭐Why it matters
Understanding your marginal tax rate helps you:
- ✓Estimate the tax impact of raises, bonuses, or side income
- ✓Understand why deductions don't save you their dollar amounts
- ✓Make smarter financial decisions (retirement, withholding, etc.)
- ✓Avoid thinking "I'll lose money by earning more" — which is NOT true
🔄Marginal vs. effective tax rate
People often confuse these two, but they're VERY different:
📈Marginal tax rate
Rate applied to your next dollar.
📊Effective tax rate
Your average tax rate across all your income.
💡 Even if your marginal rate is 22%, your effective rate might be only 10–14%.
🧮Quick example
Suppose you're a single filer with $50,000 taxable income. Your income might fall into brackets like this:
- 1️⃣The first portion taxed at 10%
- 2️⃣The next portion taxed at 12%
- 3️⃣The remainder taxed at 22%
Your marginal tax rate = 22%
(because that's the rate applied to your last dollar of income)
Important: ONLY the income in the 22% bracket is taxed at 22%. Lower portions are always taxed at the lower rates.
❌Common misunderstanding
Many people believe earning more money can "push them into a higher bracket" where ALL their income is taxed at that higher rate.
This is completely false.
Only the portion of income ABOVE the bracket threshold is taxed at the higher rate — never the entire amount.
📋Where do marginal tax rates come from?
Marginal tax rates are based on IRS tax brackets, which change each year and depend on your filing status.
Your taxable income determines which bracket you fall into.
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