What Is the Marginal Tax Rate?
Your marginal tax rate is the tax rate you pay on your highest dollar of income. The federal marginal tax rate for individuals in the United States increases as their income rises. The highest dollar earned will fall into a higher tax bracket. This means that your marginal tax rate will likely be higher than your effective tax rate, which is the average rate you pay on all your income.
This method of taxation is known as progressive taxation. It aims to tax individuals based on their earnings so low-income earners are taxed at a lower rate than higher-income earners.
Key Takeaways
- The marginal tax rate is the tax rate paid on the highest dollar of income.
- Under the progressive income tax method used for federal income tax in the United States, the marginal tax rate increases as income increases.
- Marginal tax rates are separated by income levels into seven tax brackets.
Understanding the Marginal Tax Rate
Taxpayers are divided into tax brackets or ranges under a marginal tax rate. The brackets determine the rate applied to increments of the filer's taxable income. As income increases, the last dollar earned will be taxed at a higher rate than the first dollar earned, which will be taxed at the rate for the lowest tax bracket. The last dollar earned will be taxed at the rate of the highest bracket and all the money in between is taxed at the rate for the range into which it falls.
Laws can change and affect marginal tax rates. The 2023 marginal tax rates went into effect in the United States with the passage of the Tax Cuts and Jobs Act (TCJA) on Jan. 1, 2018. The seven brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% under the previous law. The TCJA plan that was signed into law in December 2017 keeps the seven-bracket structure but adjustments were made to the tax rate percentages and the income levels.
The rates under the TCJA are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Marginal vs. Flat Tax
Another type of tax rate is the flat tax rate, which several states implement for state income tax. Under this system of taxation, people aren’t taxed on a scale as they are with the marginal tax rate. They're taxed at a flat rate across the board. Everyone is charged the same rate, regardless of their income level.
Most systems that use a flat tax rate don't allow for deductions and are seen in countries with a rising economy. Those who support this system of taxation describe it as fair because it taxes all people and businesses at the same rate.Those who oppose it believe that it results in high-income taxpayers paying less than they should for an equitable society.
Marginal Tax Rate Example
The table below shows the rates and income levels for three types of taxpayers filing in 2024 for tax year 2023: single, married filing jointly, and heads of household.
| IRS Tax Brackets for Tax Year 2023 | |||
|---|---|---|---|
| Rate | For Singles With Taxable Income Over | For Married Filing Jointly With Taxable Income Over | For Heads of Household With Taxable Income Over |
| 10% | $0 | $0 | $0 |
| 12% | $11,000 | $22,000 | $15,700 |
| 22% | $44,725 | $89,450 | $59,850 |
| 24% | $95,375 | $190,750 | $95,350 |
| 32% | $182,100 | $364,200 | $182,100 |
| 35% | $231,250 | $462,500 | $231,250 |
| 37% | $578,125 | $693,750 | $578,100 |
Individuals who make the least amount of income are placed into the lowest marginal tax rate bracket, while higher-earning individuals are placed into higher marginal tax brackets. But the marginal tax bracket in which an individual falls doesn't determine how their entire income is taxed. Income taxes are assessed progressively, with each bracket having a range of income values that are taxed at that particular rate.
A single taxpayer who earned $150,000 in taxable income would owe the following income taxes for 2023:
- 10% Bracket: ($11,000 - $0) x 10% = $1,100
- 12% Bracket: ($44,725 - $11,000) x 12% = $4,047
- 22% Bracket: ($95,375 - $44,725) x 22% = $11,143
- 24% Bracket: ($150,000 - $95,375) x 24% = $13,110
- 32% Bracket: Not applicable
- 35% Bracket: Not applicable
- 37% Bracket: Not applicable
The entire tax liability for this individual would be $29,400. This would work out to an average or effective tax rate of 19.6%: $29,400 divided by total income of $150,000.
The rates of the brackets remain constant regardless of a person's filing status but the dollar ranges that each bracket applies to change depending on whether the filer is a single person, a married joint filer, or a head-of-household filer. The dollar range of each marginal tax bracket typically increases annually to account for inflation as well due to a provision in the tax code referred to as indexing.
What Is the Effective Tax Rate?
The effective tax rate is the overall percentage of income that an individual or a corporation pays in taxes. The effective tax rate for individuals is the average rate at which their earned income (such as wages) and unearned income (such as stock dividends) are taxed. The effective tax rate for a corporation is the average rate at which its pre-tax profits are taxed.
What Is the Difference Between Effective and Marginal Tax Rates?
The effective tax rate is a more accurate representation of a person's or corporation's overall tax liability than their marginal tax rate, and it's typically lower. The marginal tax rate refers to the highest tax bracket into which their income falls. In a progressive income tax system like the one in the United States, income is taxed at differing rates that rise as income hits certain thresholds. Two individuals or companies with income in the same upper marginal tax bracket may end up with very different effective tax rates depending on how much of their income was in the top bracket.
What Is a Flat Tax?
A flat tax, also known as a regressive tax, applies the same tax rate to every taxpayer regardless of income bracket. A flat tax typically applies the same tax rate to all taxpayers with no deductions or exemptions allowed. Most flat tax systems or proposals do not tax income from dividends, distributions, capital gains, or other investments.
The Bottom Line
The U.S. has a marginal tax rate system with different tax brackets (with ever-increasing tax rates) kicking in at different levels of income. You're taxed at a certain rate for certain amounts of income that progressively get larger. You won't pay the same percentage on all of one million dollars if you make $1,000,000 a year and the tax bracket for that amount is 37%. You would instead pay marginal rates for each tax bracket up to $539,900 of income (for single filers). Only the last $460,100 would be subject to the 37% rate.
Correction—Nov. 8, 2023: This article has been corrected to reflect that the marginal tax rate is higher than the effective or average tax rate and to update federal tax brackets.
Article Sources
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Congressional Research Service. “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” Page CRS-8.
Congress.gov “H.R.1 - An Act To Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018.”
Tax Foundation. "State Individual Income Tax Rates and Brackets, 2023.”
Internal Revenue Service. “Federal Income Tax Rates and Brackets.”
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