The marginal tax rate is the highest income tax rate you’ll pay on your income. Because the U.S. has a progressive tax system, different tiers of your income are taxed at different rates. The marginal tax rate is the rate that applies to your highest dollar of income.
It’s important to understand how the marginal tax rate — and tax brackets in general — work, because your income isn’t taxed at one single rate. What’s more, by claiming all applicable tax deductions you may be able to reduce your marginal tax rate.
What is the marginal tax rate?
As your income increases, portions of it are taxed at higher rates. The tax rate that applies to your final dollar of income is your marginal tax rate.
The progressive nature of the U.S. income tax system means that the tax rates for each of the applicable tax brackets up to and including your total taxable income will determine your tax liability. And because only a portion of your income is taxed at the highest rate, your effective tax rate is likely lower than your marginal rate.
2024 tax brackets (for taxes due in 2025)
| Tax rate | Single | Head of household | Married filing jointly or qualifying widow | Married filing separately |
|---|---|---|---|---|
| 10% | $0 to $11,600 | $0 to $16,550 | $0 to $23,200 | $0 to $11,600 |
| 12% | $11,601 to $47,150 | $16,551 to $63,100 | $23,201 to $94,300 | $11,601 to $47,150 |
| 22% | $47,151 to $100,525 | $63,101 to $100,500 | $94,301 to $201,050 | $47,151 to $100,525 |
| 24% | $100,526 to $191,950 | $100,501 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 |
| 32% | $191,951 to $243,725 | $191,951 to $243,700 | $383,901 to $487,450 | $191,951 to $243,725 |
| 35% | $243,726 to $609,350 | $243,701 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 |
| 37% | $609,351 or more | $609,351 or more | $731,201 or more | $365,601 or more |
Source: IRS
How do marginal tax rates work?
Suppose you’re a single taxpayer who earned $70,000 in 2024. While your income falls into the 22 percent tax bracket — that’s your marginal tax rate — a majority of your income is actually taxed at much lower rates. Based on the 2024 tax brackets, for taxes due in 2025, this is how your income is taxed:
In other words, $11,600 of your income is taxed at 10 percent, $35,550 of your income is taxed at 12 percent and the remaining $22,850 of your income is taxed at 22 percent.
As the above illustration shows, you pay the lowest tax rate on a subset of your income, until you’ve surpassed the top end of the income range for that tax bracket. Then the next tier of your income is taxed at the next highest rate, until you’ve surpassed the top end of the income range for that bracket, and so on.
One of the biggest misunderstandings many Americans have about income taxes is that they think falling into a particular bracket, such as the 22 percent bracket, means that all of their income is taxed at that rate. In truth, that rate only applies to a portion of your income.
How to calculate your marginal tax rate
To calculate your marginal tax rate, you need to know your taxable income and relevant filing status. With this information, it’s simple to determine your marginal tax rate. Refer to the tax brackets for the current tax year and identify the bracket with the income range that matches your total taxable income — that’s your marginal tax rate.
That said, your taxable income is a bit more complex to calculate:
- First, add up all of your sources of income to determine your gross income.
- Then, subtract certain adjustments to determine your adjusted gross income (AGI).
- Then, determine whether you will take the standard deduction or itemize deductions.
- Finally, subtract your standard deduction or itemized deduction from your AGI to get your taxable income (some taxpayers may also be able to deduct the qualified business income deduction from their AGI).
On Form 1040, your adjusted gross income, or AGI, is listed on line 11, and your taxable income is listed on line 15.
How to lower your marginal tax rate
To reduce your marginal tax rate, you must reduce your taxable income. While it may be possible for some people to defer income that they earn late in the year to the following year, most people will need to take advantage of tax deductions. By reducing your marginal tax rate, you’ll also reduce your total tax obligations.
Maximize tax deductions and tax-advantaged contributions
To reduce your taxable income, consider maximizing contributions to tax-advantaged accounts and claiming all applicable deductions.
The more money you contribute to tax-advantaged accounts — like a 401(k), traditional IRA, health savings account (HSA) or flexible spending account (FSA) — the more you will reduce your taxable income, while also setting yourself up financially for the future.
You should also make sure you’re claiming all eligible deductions, even if you take the standard deduction. There are several “above-the-line” deductions that will reduce your gross income, even if you don’t itemize your taxes, including deductions for student loan interest and educator expenses, along with certain business expenses and self-employment taxes. Maximizing your deductions could lower your marginal tax rate.
Finally, you may want to carefully assess whether it makes sense to itemize deductions instead of taking the standard deduction. By itemizing, you can take advantage of even more deductions, including those for charitable contributions, mortgage interest, property taxes, state and local taxes (SALT), and qualified medical expenses.
Still, for it to make sense to itemize, generally your itemized expenses need to add up to more than the standard deduction. The standard deduction is worth $14,600 for single filers and $29,200 for married filing jointly couples for tax year 2024.
Reduce your income by realizing capital losses
Another way to trim your tax bill is by realizing losses on your investments — that means selling investments at a loss. Whenever you sell an investment for less than you bought it, you’ll realize a capital loss. Not only can capital losses offset capital gains (when you sell an investment for more than you bought it), but you can also reduce some of your taxable income.
You need to be mindful of how long you’ve owned an asset before selling — the IRS generally uses the one-year mark to differentiate between short- and long-term gains and losses. That’s because short-term capital losses will offset short-term capital gains, while long-term capital losses will offset long-term capital losses. By realizing net capital losses, you can reduce your taxable income by up to $3,000 a year, which will reduce your overall tax obligations and potentially reduce your marginal tax rate.
Marginal tax rate vs. effective tax rate
For most taxpayers, your marginal tax rate will differ from your effective tax rate. Knowing the difference between your marginal tax rate and effective tax rate is important because it informs how much you owe the IRS.
Your marginal tax rate is the highest rate that applies to only a portion of your income in the highest tax bracket, whereas your effective tax rate is your average tax rate — or the tax rate you actually pay. Consider the above example of a single taxpayer earning $70,000. While that person’s marginal tax rate is 22 percent, their effective tax rate is about 15 percent. To determine your effective tax rate, simply divide your total taxes owed by your taxable income.
Marginal tax rate vs. flat tax rate
While the federal income tax system in the U.S. is progressive, some states impose a flat income tax. With a marginal tax rate, you pay different tax rates up to your highest rate, but with a flat tax system all of your income is taxed at the same rate.
There has been a movement in recent years among states to adopt flat tax rate systems, though specific rates across states vary widely. The 12 states with a flat tax system, as of 2024, are: Arizona, Colorado, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, North Carolina, Mississippi, Pennsylvania, and Utah, according to the Tax Foundation. Iowa will have a flat tax starting in 2026. Another nine states don’t levy an income tax at all.
Read the full article here
