Your marginal tax rate is the tax rate you pay on your highest dollar of taxable income. In the United States, the federal marginal tax rate for individuals increases as their income rises, aligning with a progressive taxation system. As income grows, the highest dollar earned falls into a higher tax bracket. This often results in a marginal tax rate that is higher than your effective tax rate, which is the average rate you pay on all your income.
This method of taxation, known as progressive taxation, aims to tax individuals based on their earnings so that low-income earners are taxed at a lower rate than higher-income earners.
Key Takeaways
- The marginal tax rate is the tax rate paid on the highest dollar of income.
- Under the progressive income tax method used for federal income tax in the U.S., the marginal tax rate increases as income increases.
- Marginal tax rates are divided into seven tax brackets by income levels.
- Individuals aren’t taxed solely at the rate of the tax bracket they fall into (unless they fall into the lowest tax bracket).
- Taxes are calculated at various rates as taxable income rises through the tax brackets.
Mastering Marginal Tax Rates
Taxpayers are divided into tax brackets or ranges under a marginal tax system. These brackets determine the rate applied to increments of the filer’s taxable income.
As income increases, the last dollar of taxable income will be taxed at a higher rate than the first dollar earned. The last dollar earned will be taxed at the rate of the highest bracket that a taxpayer reaches, and all the money in between will be taxed at the rate for the range into which it falls.
Laws can change and affect marginal tax rates. The existing marginal tax rates went into effect in the U.S. on Jan. 1, 2018, due to the passage of the Tax Cuts and Jobs Act (TCJA). The TCJA kept the seven-bracket structure but made adjustments to both the tax rate percentages and the income levels.
The current rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Prior to this change, the rates were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Progressiveness vs. Flatness in Taxation
Another type of tax rate is the flat tax rate, which several states implement for state income tax. Under this system of taxation, people aren’t taxed on a scale as they are with the marginal tax rate system. Instead, they’re taxed at a flat rate across the board—everyone is charged the same rate, regardless of their income level.
Most systems that use a flat tax rate don’t allow for deductions. Flat tax systems are common in countries with a growing economy. Supporters of this system of taxation describe it as fair because it taxes all people and businesses at the same rate. Opponents believe it results in high-income taxpayers paying less than they should for an equitable society.
Marginal Tax Rate in Action: A Detailed Example
The table below shows the rates and income levels for three types of taxpayers filing for tax year 2024: single, married filing jointly, and heads of household.
| Rate | Single Taxable Income | Married Filing Jointly Taxable Income | Heads of Household Taxable Income |
|---|---|---|---|
| 10% | $0 | $0 | $0 |
| 12% | $11,600 | $23,200 | $16,550 |
| 22% | $47,150 | $94,300 | $63,100 |
| 24% | $100,525 | $201,050 | $100,500 |
| 32% | $191,950 | $383,900 | $191,950 |
| 35% | $243,725 | $487,450 | $243,700 |
| 37% | $609,350 | $731,200 | $609,350 |
Individuals who earn smaller sums of income fall into lower marginal tax rate brackets, while higher earners reach higher marginal tax brackets.
But the tax rate for the marginal bracket into which an individual falls isn’t the sole rate that determines the tax on their entire income. For instance, if you fall into the 24% tax bracket based on your total taxable income, not all of your total income is taxed at 24%. The portion that falls in the 10%, 12%, and 22% brackets is taxed at those rates. Only the portion above those brackets is taxed at 24%.
Taxes are assessed progressively—each bracket has a range of income taxed at that rate.
Let’s analyze an example. A single taxpayer who earned $150,000 in taxable income would owe the following income tax for tax year 2024:
- 10% Bracket: ($11,600 - $0) x 10% = $1,160
- 12% Bracket: ($47,150 - $11,600) x 12% = $4,266
- 22% Bracket: ($100,525 - $47,150) x 22% = $11,742
- 24% Bracket: ($150,000 - $100,525) x 24% = $11,874
- 32% Bracket: Not applicable
- 35% Bracket: Not applicable
- 37% Bracket: Not applicable
The entire tax liability for this individual would be $29,042 ($1,160 + $4,266 + $11,742 + $11,874), resulting in an average or effective tax rate of 19.36% ($29,042 divided by total income of $150,000).
The tax rates of the brackets remain constant regardless of a person’s filing status. However, the dollar range to which each bracket applies changes depending on whether the filer is single, married filing jointly, or a head-of-household filer.
Additionally, the dollar range of each marginal tax bracket typically increases annually to account for inflation due to a provision in the tax code referred to as indexing.
Effective vs. Marginal Tax Rate
The effective tax rate is the overall percentage of income that an individual or corporation pays in taxes. The effective tax rate for individuals is the average rate at which their earned and unearned income is taxed. For corporations, it is the average rate at which pre-tax profits are taxed.
The effective tax rate is a more accurate representation of someone’s or a company’s overall tax liability than their marginal tax rate, which is typically higher. The marginal tax rate refers to the highest tax bracket into which their income falls. In a progressive system like the one in the U.S., income is taxed at different rates that increase as income hits certain thresholds.
What Is a Flat Tax?
A flat tax, also known as a regressive tax, applies the same tax rate to every taxpayer regardless of their income. No deductions or exemptions are allowed, and income from dividends, capital gains, or other investments typically is not taxed.
The Bottom Line
The U.S. uses a marginal tax rate system, in which different tax brackets with increasing rates apply as income levels rise. This results in taxpayers being charged a specific percentage for certain portions of their income, progressively getting larger.
You won’t pay a top tax rate on all of your income if you make a high amount, like $1,000,000. Instead, you’ll be taxed incrementally, with each portion subject to its respective marginal rate.
Related Terms: effective tax rate, tax liability, tax brackets, flat tax, state income tax.
References
- Congress.gov “H.R.1 - An Act To Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”.
- Congressional Research Service. “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law”. Page CRS-8.
- Tax Foundation. “State Individual Income Tax Rates and Brackets, 2024”.
- Internal Revenue Service. “Internal Revenue Bulletin: 2023-48”.
