Definition
The marginal tax rate is the percentage of tax paid on the last dollar of income. The U.S. uses a progressive system where income is taxed in brackets: the first dollars are taxed at low rates, with higher rates applying to higher income levels. Understanding your marginal rate is essential for retirement planning, Roth conversion decisions, and investment tax optimization.
lightbulb Example
A single filer earning $95K falls in the 22% bracket. Their next dollar is taxed at 22%. But their effective (average) rate is much lower because the first $11,600 was taxed at 10%, $11,601-$47,150 at 12%, and $47,151-$95K at 22%.
verified_user Key Points
- Rate on the next dollar of income
- U.S. has progressive brackets: 10% to 37%
- Effective rate is always lower than marginal rate
- Critical for Roth conversion and retirement planning