Tax glossary

Marginal Tax Rate

Marginal Tax Rate — what it means, how it works, and a real example, explained without the jargon.

What is Marginal Tax Rate?

Your marginal tax rate is the rate charged on your next dollar of income — the bracket your last dollar lands in. It's the number that matters for decisions, not your average rate.

How it works

Because the system is progressive, each additional dollar you earn is taxed at your top bracket's rate until it fills that bracket and spills into the next. That's why the marginal rate drives choices like whether to defer a bonus or make a bigger pre-tax retirement contribution.

A quick example

If you're single with $95,000 of taxable income, you're in the 22% marginal bracket — so a $1,000 401(k) contribution saves you $220 in federal tax, because it comes off those top-taxed dollars.

What people get wrong

Add your state's marginal rate to the federal one to see your true "next-dollar" rate. In a state like California, a high earner's combined marginal rate can top 45%.

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Frequently asked questions

What does Marginal Tax Rate mean?

Your marginal tax rate is the rate charged on your next dollar of income — the bracket your last dollar lands in. It's the number that matters for decisions, not your average rate.

How does Marginal Tax Rate work?

Because the system is progressive, each additional dollar you earn is taxed at your top bracket's rate until it fills that bracket and spills into the next. That's why the marginal rate drives choices like whether to defer a bonus or make a bigger pre-tax retirement contribution.

What's the most common mistake with marginal tax rate?

Add your state's marginal rate to the federal one to see your true "next-dollar" rate. In a state like California, a high earner's combined marginal rate can top 45%.