Definition
The marginal tax rate is the rate you pay on your last dollar of income.
How It Works
The U.S. uses a progressive bracket system, so income is taxed in layers. Only the income that falls within each bracket is taxed at that bracket's rate, which means your top dollar is taxed at your marginal rate while earlier dollars are taxed at lower rates.
Example
A single filer in the 32% bracket pays 32% only on the income above that bracket's threshold, not on their entire income.
Who It Applies To
Every taxpayer with income spanning more than one bracket.
Watch-Outs
The marginal rate is what matters when weighing an extra dollar of income or a dollar of deduction, but it is often confused with the effective rate, which is usually much lower.
