Marginal Tax Rate: What It Is and How To Determine It, With Examples

What Is the Marginal Tax Rate?

Your marginal tax rate is the tax rate that you pay on your highest dollar of taxable income. The federal marginal tax rate for individuals in the United States increases as their income rises. As income grows, the highest dollar earned will fall into a higher tax bracket. This means that your marginal tax rate will likely be higher than your effective tax rate, which is the average rate you pay on all your income.

This method of taxation is known as progressive taxation. It aims to tax individuals based on their earnings so that low-income earners are taxed at a lower rate than higher-income earners.

Understanding the Marginal Tax Rate

Taxpayers are divided into tax brackets or ranges, under a marginal tax rate. The 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 (which is taxed at the rate for the lowest tax bracket). The last dollar earned will be taxed at the rate of the highest bracket that a taxpayer reaches and all the money in between is 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 adjustments were made to the tax rate percentages and the income levels.

The rates under the TCJA are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Prior to the change, the rates were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Marginal vs. Flat Tax

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. 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 seen in countries with a rising economy. Those who support this system of taxation describe it as fair because it taxes all people and businesses at the same rate. Those who oppose it believe that it results in high-income taxpayers paying less than they should for an equitable society.

Marginal Tax Rate 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.

Individuals who make smaller amounts of income fall into the lower marginal tax rate brackets, while higher-earning individuals reach higher marginal tax brackets.

But the tax rate for the marginal tax 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, that total income isn't taxed at 24%. The portion of it that falls in the 10%, 12%, and 22% brackets is taxed at those rates. Only the portion above those brackets would be taxed at 24%.

That's because, as mentioned, income taxes are assessed progressively, with each bracket having a range of income values that are taxed at that particular rate. 

Let's work through 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). This would work out to 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 a single person, a married joint filer, or a head-of-household filer.

In addition, the dollar range of each marginal tax bracket typically increases annually to account for inflation as well due to a provision in the tax code referred to as indexing.

The Bottom Line

The U.S. has a marginal tax rate system with different tax brackets (with ever-increasing tax rates) kicking in at different levels of income. You're taxed at a certain rate for certain amounts of income that progressively get larger.

That is, you won't pay 37%, the top tax rate, on all of $1,000,000 if you make that amount. You would instead pay the marginal rates on income within each tax bracket up to $609,350 of income (for single filers). Only the last $390,650 would be subject to the 37% rate.

Correction—Nov. 8, 2023: This article has been corrected to reflect that the marginal tax rate is higher than the effective or average tax rate and to update federal tax brackets.