Marginal Tax Rate
The tax rate applied to your last (highest) dollar of taxable income. It indicates how much tax you would pay on an additional dollar of earnings.
Your marginal tax rate is the rate at which your next dollar of taxable income would be taxed. It corresponds to the highest tax bracket that applies to your income. For instance, if your taxable income puts you in the 22% bracket, your marginal rate is 22%.
The marginal rate is especially useful for financial planning decisions. When deciding whether to contribute to a pre-tax 401(k) versus a Roth 401(k), your marginal rate tells you the immediate tax savings of a pre-tax contribution. A $1,000 pre-tax contribution at a 22% marginal rate saves $220 in taxes now.
It is important not to confuse marginal rate with effective rate. Your marginal rate applies only to income at the top of your bracket, while your effective rate is the average rate across all your income. Most taxpayers have an effective rate significantly lower than their marginal rate due to the progressive bracket structure.
How it works
Your marginal tax rate is the rate that applies to your next dollar of taxable income — it corresponds to whichever tax bracket the top slice of your income currently sits in. If your taxable income places you in the 22% bracket, that 22% is your marginal rate, even though every dollar below the top of the 12% bracket is taxed at lower rates. The marginal rate only describes the edge of your income, not your income as a whole.
The marginal rate is where financial decisions actually get evaluated, because it tells you the tax consequence of one additional dollar of income or one additional dollar of deduction. Deciding between a pre-tax and a Roth 401(k) contribution, evaluating whether to realize a capital gain this year or next, and estimating the tax cost of a year-end bonus all depend on your marginal rate rather than your average rate across all your income.
People frequently mix up marginal rate with effective rate — the marginal rate applies only to your last dollar of income, while the effective rate is your total tax divided by your income, which blends in every lower bracket you passed through on the way up. Because of the graduated bracket structure, most taxpayers' effective rate sits well below their marginal rate, and a raise that pushes you into a higher marginal bracket only affects the incremental income above that bracket's threshold, not the income you already earned in lower brackets.
Example: using the marginal rate for a 401(k) decision
You are deciding whether to make a $1,000 pre-tax contribution to your 401(k), and your taxable income currently sits in the 22% bracket.
Because pre-tax contributions reduce income at your marginal rate, that $1,000 contribution saves you $220 in federal tax this year (22% of $1,000). If your income were instead in the 12% bracket, the same $1,000 contribution would only save $120, which is why the value of pre-tax saving grows as your marginal rate rises.
Frequently asked questions
What does marginal tax rate mean?
Is my marginal tax rate the same as my effective tax rate?
Why does my marginal rate matter for retirement planning?
Related Terms
Tax Bracket
A range of income taxed at a specific rate. The US uses a progressive system with seven brackets ranging from 10% to 37% for 2025.
Effective Tax Rate
Your total federal income tax divided by your total income, expressed as a percentage. It represents the average rate at which your income is actually taxed.
Taxable Income
The portion of your income that is actually subject to federal income tax, calculated by subtracting the standard or itemized deduction from your AGI.