The marginal tax rate plays a key role in the U.S. federal income tax system, which uses a progressive tax structure. This means income is taxed at increasing rates as it moves into higher tax brackets. Your marginal tax rate is not the tax you pay on your total income; rather, it is the rate applied to the last portion of your income that falls within the highest tax bracket you reach.
For example, in 2025, the federal income tax brackets for a single filer start at 10% and gradually increase to 37% for income over $578,125. If you earn $100,000 as a single filer, your income is taxed in segments: 10% on the first $11,000, 12% on the income between $11,001 and $44,725, 22% on income between $44,726 and $95,375, and 24% on income from $95,376 up to $100,000. The 24% rate is your marginal tax rate because it applies to the last dollar earned.
Understanding your marginal tax rate is essential for tax planning decisions, such as estimating the tax impact of additional income, bonuses, or deductible expenses. It helps you gauge how much tax you would owe on incremental income rather than the effective tax rate, which represents the average tax rate paid on your entire income.
According to the IRS, the tax brackets and rates are updated annually to adjust for inflation, which protects taxpayers from “bracket creep”—a situation where inflation pushes income into higher tax brackets without an actual increase in real income.
It’s helpful to compare the marginal tax rate with the effective tax rate, which is calculated by dividing the total tax paid by total income. While the marginal tax rate affects decisions about earning additional income, the effective tax rate provides a measure of your overall tax burden.
For more detailed IRS guidance, see IRS Publication 17, which explains federal income tax basics and bracketed tax calculations in detail.
Understanding your marginal tax rate can also guide your financial planning, like timing income or deductions strategically to manage your tax liability efficiently. This concept extends beyond individual income tax to other areas, including capital gains tax rates and certain business taxes.
In summary, the marginal tax rate is the specific rate at which the last dollar of your income is taxed. It plays a vital role in tax planning and helps you understand how additional income will be taxed under the current tax laws.
