Marginal Tax Rate System: Definition, How It Works and Rates

What Are Marginal Tax Rates?

The U.S. marginal tax rate is the additional tax paid for every additional dollar earned as income. Tax systems employing marginal tax rates apply different tax rates to different levels of income. As income rises, each additional bracket of income is taxed at a higher rate.

The goal of the marginal rate is to place a larger share of the burden on the shoulders of the wealthiest taxpayers while lightening the load for those with the lowest incomes.

Key Takeaways

  • The marginal tax rate is the additional tax paid for every additional dollar earned as income.
  • In the United States, marginal tax rates range from 10% to a maximum of 37%.
  • Income taxes are calculated based on tax filing status, such as married or single, and the individual's taxable income.

Understanding the Marginal Tax Rate System

Every year the Internal Revenue Service publishes an updated schedule for tax brackets, after adjusting for inflation and other factors.

Marginal tax brackets and federal income tax rates for 2023
 Marginal Tax Rate Single/Married Filing Separately Married Filing Jointly  Heads of Household
10% Up to $11,000 Up to $22,000 Up to $15,700
12% $11,000 to $44,725 $22,000 to $89,450 $15,700 to $59,850
22% $44,725 to $95,375 $89,450 to $190,750 $59,850 to $95,350
24% $95,375 to $182,100 $190,750 to $364,200 $95,350 to $182,100
32% $182,100 to $231,250 $364,200 to $462,500 $182,100 to $231,250
35%   $231,250 to $578,125 $462,500 to $693,750 $231,250 to $578,100
37%  Over $578,125  Over $693,750 Over $578,100
Source: Internal Revenue Service.

Income taxes are calculated based on tax filing status and the individual's taxable income. Each tax rate applies only to income within that tax bracket and an individual moving to a higher bracket will never lose money in after-tax income. A single person will pay 10% of their income below $11,000, 12% of any income between $11,000 and $44,725, and so on.

These figures represent only federal income taxes. State and local governments may impose their income taxes, with different marginal tax brackets.

Example of a Marginal Tax Rate

Sample Marginal Tax Rates
Taxable Income Marginal Tax Rate
Less than $20,000 10%
Between $20,000–$40,000 20%
Between $40,000–$60,000 30%
Between $60,000–$100,000 40%
Over $100,000 50%
For demonstration purposes only.

The above is a simple example of a marginal tax rate schedule and does not represent actual tax brackets.

In this example, a taxpayer earning $20,000 per year will have to pay 10% of their income, or $200. A taxpayer earning $20,001 will pay $200.20: 10% of the first $20,000 of income, and then 20% of the remaining dollar.

Likewise, a person who earns $200,000 per year will have to pay 10% of their first $20,000 in income, 20% of the next $20,000, and so on. The last $100,000 of income is taxed at 50%; they will pay $78,000 in income taxes per year. Their effective tax rate—the percentage of income paid in taxes—is 34%.

If a taxpayer earns more money and moves into a higher income level, marginal tax rates can significantly diminish the benefit of the additional income because it will be taxed at a higher rate. As a result, some believe marginal tax rates are harmful to the economy because they discourage people from working harder to earn more money.

Many people mistakenly believe that marginal tax rates apply to all income, rather than income in a certain bracket. Although earning more money may increase the income tax rate, a larger income will always provide more after-tax income than a smaller income.

Is It Cheaper to Earn Less?

Some people mistakenly believe that a higher income bracket will reduce their net income. While marginal taxes increase with each bracket, these taxes apply only to income within that income bracket.

Marginal Tax Rate Strategies

While the marginal tax system is straightforward, it isn't the only factor in income tax calculations. There are also many tax breaks that can be used to reduce the tax burden on an individual or family.

Broadly speaking, there are two ways to reduce your tax bill: credits and deductions. A tax deduction reduces the amount of income that is subject to taxation. Certain retirement contributions, insurance premiums, Health Savings Accounts (HSAs), and business expenses may be eligible for deduction. Most taxpayers also choose the standard deduction, but in some cases, you can save more by itemizing deductions.

Conversely, a tax credit reduces your final tax bill, and may even offer a tax refund if it falls below $0. Some examples include the Earned Income Tax Credit for certain low-income families, or the Child Tax Credit gives families $2,000 per child.

Each of these tax breaks has its own conditions and requirements, and it's worth taking the time to research so you can save the most on your taxes.

Is Marginal Tax the Same as Tax Bracket?

Marginal tax is related to tax brackets, but they are not the same. A tax bracket refers to the range of incomes that are subject to the corresponding marginal tax. For example, in 2023, there is a marginal tax of 12% on the $11,000-$44,725 tax bracket. Income within that bracket is taxed at 12%, but income below $11,000 is taxed at only 10%.

What Is the Effective Tax Rate?

The effective tax rate is the total amount of taxes paid by a person or corporation, represented as a percentage of their income. This is distinct from marginal tax rates, which apply to income within specific tax brackets.

At What Age Is Social Security No Longer Taxed?

Social Security benefits may be taxed, depending on the recipients' income. This is calculated by taking 50% of a person's Social Security benefits and adding that figure to their adjusted gross income and any tax-exempt interest income. If the sum is more than $25,000 ($32,000 for married couples filing jointly) the recipient must pay taxes on a portion of their benefits, regardless of age.

What Is a Flat Tax?

The other tax system used in modern economics is flat taxes. The rate does not change with flat taxes, regardless of the individual's income. No matter how much a person makes, they would be taxed at the same percentage.

The Bottom Line

The marginal tax is a complicated and often misunderstood feature of the progressive income tax system. As a person's income rises to a new tax bracket, that income is taxed at a higher rate. However, marginal tax rates are not the only factor in calculating one's obligations, and a skilled accountant can identify many ways to reduce their clients' tax burdens.

Article Sources
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  1. The Tax Foundation. "Marginal Tax Rate."

  2. Internal Revenue Service. "Rev. Proc. 2022-38," Pages 5-7.

  3. Internal Revenue Service. "Credits and Deductions for Individuals."

  4. Internal Revenue Service. "What You Need to Know about CTC, ACTC and ODC."

  5. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2023."

  6. Social Security Administration. "Income Taxes And Your Social Security Benefit."