Marginal Tax Rate
The rate of tax applied to the last dollar of a taxpayer's taxable income — the highest tax bracket that the taxpayer's income reaches in the current progressive tax system.
Your marginal tax rate is the percentage at which your next dollar of taxable income will be taxed. In a progressive system like the U.S. federal income tax, this is simply the rate of the highest bracket your income reaches. If you are a single filer in 2025 with $75,000 of taxable income, your marginal rate is 22% — even though much of your income was taxed at lower rates in the 10% and 12% brackets below.
The marginal rate is the figure that matters for many financial decisions because it represents the tax cost of earning (or saving) one more dollar. If you are considering whether to contribute to a traditional IRA (which reduces taxable income) or a Roth IRA (which provides no current deduction but allows tax-free withdrawals), your marginal rate today compared with your expected marginal rate in retirement is the key factor. At a 24% marginal rate today and an expected 12% rate in retirement, the traditional IRA's immediate deduction is more valuable.
For investors, marginal rate is critical for evaluating taxable bond versus municipal bond decisions. Municipal bond interest is exempt from federal income tax, so their after-tax yield equals their stated yield. A taxable corporate bond must offer a higher yield to match a muni's after-tax return; the 'tax-equivalent yield' equals the muni yield divided by (1 minus the marginal rate). At a 37% marginal rate, a 4% muni bond is equivalent to a 6.35% taxable bond.
Marginal rates also determine the value of deductions. A $10,000 deduction at a 24% marginal rate saves $2,400 in taxes; the same deduction at a 37% rate saves $3,700. This is why high-income earners benefit more from itemized deductions like charitable contributions and mortgage interest, and why bunching deductions into high-income years can be advantageous.
It is important to distinguish marginal rate from effective tax rate: the marginal rate is the rate on the last dollar, while the effective rate is the average rate across all income. A taxpayer with a 37% marginal rate may have an effective rate of only 20% because most of their income was taxed at lower bracket rates. Both figures are useful, but for incremental decisions, the marginal rate is almost always the relevant one.