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Updated December 30, 2020

What Is Marginal Tax Rate?

Marginal tax rate is the rate at which an additional dollar of taxable income would be taxed. It is part of a progressive tax system, which applies different tax rates to different levels of income. As income rises, it is taxed at a higher rate (according to the marginal tax bracket it falls in).

It’s important to note that income is not taxed at a single rate, but at multiple rates, according to each tax bracket it falls in. Each tax rate only applies to income that falls within the corresponding bracket –  each additional dollar beyond that bracket will be taxed at the next highest marginal rate.

Marginal Tax Rate Example

Sarah is an accountant for XYZ firm and has a taxable income of $100,000 per year. Here’s how her income would be taxed using the following marginal tax rate examples:

Tax bracketMarginal Tax RateAmount taxableTax payable
$0-$20,0000%$20,000$0
$20,000-$40,00010%$20,000$2,000
$40,000-$60,00020%$20,000$4,000
$60,000-$80,00030%$20,000$6,000
$80,000-$100,00040%$20,000$8,000
$100,000+50%$0$0
 Total$100,000$20,000

As you can see, Sarah’s income will be taxed at different rates as it moves through the tax schedule, increasing as it enters each new bracket. Since any additional earnings would fall into the $100,000+ bracket, her marginal tax rate would be 50%.

How to Calculate Marginal Tax Rate

Calculating marginal tax rate is done by multiplying the income in a given bracket by the adjacent tax rate.

Wondering how marginal tax rate will affect an increase in income? You need to first consider which bracket your current income lies in. If your income will still remain in the same bracket after the increase, you’d simply multiply the increase by the corresponding tax rate. 

Example #1

John’s taxable income is $50,000 per year, meaning his marginal tax rate is 20%. He gets a raise of $10,000, which brings his income to $60,000 per year. The additional income would be taxed at 20% because that income still falls within his current tax bracket. In this situation, his raise would be subject to: $10,000 x 0.20 = $2,000 in taxes.

Tax bracketTax Rate
$0-$20,0000%
$20,000-$40,00010%
$40,000-$60,00020%
$60,000-$80,00030%

If an increase in income pushes your income into the next tax bracket, the increase is subject to two tax rates. First, it will be taxed at your current marginal tax rate until it reaches the top end of your current bracket. Second, any amount that exceeds your current bracket will be taxed at the next highest rate. 

Example #2

John’s income is $50,000 per year, meaning his marginal tax rate is 20%. John gets a raise of $15,000, bringing his income to $65,000 per year. The first $10,000 of his raise would be taxed at 20% because it’s within his current bracket, but the next $5,000 would be taxed at 30% because it falls within the next bracket. In this situation, his raise would be subject to: ($10,000 x 0.20 = $2,000) +  ($5,000 x 0.30 = $1,500) = $3,500 in taxes

Tax bracketTax Rate
$0-$20,0000%
$20,000-$40,00010%
$40,000-$60,00020%
$60,000-$80,00030%

Common Misconceptions of Marginal Tax Rate 

Filing your taxes can be a daunting task. Not only are there all sorts of terms and forms to be aware of, but there are also a variety of different tax rates that are easily confused. Here’s how marginal tax rate compares to other common tax rates:

Effective Tax Rate and Marginal Tax Rate

Unlike marginal tax rate – which is the highest rate that applies to your income – an effective tax rate is the overall percentage of your income that goes towards taxes. It’s calculated by dividing the total amount of tax payable by pre-tax income. 

Using the example above, Sarah’s effective tax rate would be:

Effective tax rate

In this situation, Sarah’s effective tax rate would be 20% (compared to her marginal tax rate of 50%). 

Flat Tax Rate and Marginal Tax Rate

A flat tax rate is exactly what it sounds like: It’s a single tax rate that is applied to all incomes, regardless of the amount. Using Sarah’s $100,000 income example, a flat tax of 15% means that Sarah would owe $15,000 in taxes. 

It’s worth noting that some states utilize a flat income tax rate, such as Colorado, Illinois, Indiana, Massachusetts, Michigan, New Hampshire, Pennsylvania, and Tennessee.

2020 US Federal Income Tax Brackets

Marginal tax rates and brackets can change from year to year, like the adjustments made by the Tax Cuts and Jobs Act in 2018. While rates and income brackets could be subject to change in the future, here are the marginal tax brackets for 2020:

Tax rate

Single filer

Income above

Married individuals filing jointly

Income above

Married individuals filing separately

Income above

Head of household

Income above

10%$0$0$0$0
12%$9,875$19,750$9,875$14,100
22%$40,125$80,250$40,125$53,700
24%$85,525$171,050$85,525$85,500
32%$163,300$326,600$163,300$163,300
35%$207,350$414,700$207,350$207,350
37%$518,400$622,050$311,026$518,400

Keep reading for more information on 2021 marginal tax rates.

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At InvestingAnswers, all of our content is verified for accuracy by Mark Herman, CFP and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Marginal Tax Rate.
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Mark Herman has been helping friends with financial questions since serving as an Army helicopter pilot. Since then, he’s gained valuable experience in the corporate world before moving on to become a CERTIFIED FINANCIAL PLANNER™.

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