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Marginal Tax Rate

Updated March 16, 2021

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).

Note: 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 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 Do You Calculate Marginal Tax Rate? 

To calculate marginal tax rate, multiply the income in a given bracket by the adjacent tax rate.

Wondering how marginal tax rates can affect an increase in income? Consider which bracket your current income falls. If your income will remain in the same bracket after the increase, you’ll simply multiply the increase by the corresponding tax rate. 

Marginal Tax Rate Calculation 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, bringing his income to $60,000 per year. The additional income will be taxed at 20% because that income still falls within his current tax bracket. In this situation, his raise is 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. 

Marginal Tax Rate Calculation 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 will be taxed at 20% because it’s within his current bracket, but the next $5,000 will be taxed at 30% because it falls within the next bracket. In this situation, his raise is 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:

what is 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 vs. 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% would mean that Sarah owes $15,000 in taxes. 

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

US Federal 2020 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%$9,876$19,751$9,876$14,101
22%$40,126$80,251$40,126$53,701
24%$85,526$171,051$85,526$85,501
32%$163,301$326,601$163,301$163,301
35%$207,351$414,701$207,351$207,351
37%$518,401$622,051$311,026$518,401

 

US Federal 2021 Marginal Tax Rates

For taxes due in April 2022, the following 2021 marginal tax rates apply:

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%$9,951$19,901$9,876$14,201
22%$40,526$81,051$41,126$54,201
24%$86,376$172,751$85,526$86,351
32%$164,926$329,851$163,301$164,901
35%$209,426$418,851$207,351$209,401
37%$523,601$628,301$311,025$523,601
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