What Is Your Marginal Tax Rate?

Authored by Anne Johnson via The Epoch Times (emphasis ours),

The highest tax rate you’ll pay on your income is called the marginal tax rate. The United States has a progressive tax system, which means that different tiers of income are taxed at varying rates.

You should know how the marginal rate works when planning your tax filings. This can be especially important if you receive bonuses from work or have other streams of income.

Marginal Tax Rate Depends on Last Dollar of Income

When people discuss what tax bracket they are in, they usually give a flat number. They may say they’re in the 22 percent tax bracket. But that isn’t entirely true. You may fall into the 22 percent tax bracket, but your total income isn’t taxed at 22 percent.

When people state this, they are usually talking about their marginal tax rate. Your marginal tax rate is the percentage of tax you pay on your last dollar of income. This means it’s the last tax bracket into which your income falls.

Keep in mind that with a progressive tax, you’re taxed at different rates according to how your income is tiered.

Using a single filer as an example, the IRS tax brackets for tax year 2025 are:

• 10 percent: for income $11,925 or less
• 12 percent: for income over $11,925
• 22 percent: for income over $48,475
• 24 percent: for income over $103,350
• 32 percent: for income over $197,300
• 35 percent: for income over $250,525
• 37 percent: for income over $626,350

An example of the marginal tax would be using single filer Frank with a taxable income of $50,000 (deductions have already been applied in this example).

Frank would be taxed:

• 10 percent on the first $11,925, which equals $1,192.50
• 12 percent on the next $36,550, which equals $4,386
• 22 percent on the remaining $1,525, which equals $335.50

Frank’s marginal tax rate is 22 percent because it’s the rate applied to his last dollar of income. That 22 percent doesn’t apply to all his income.

It’s important to know your marginal tax rate. It can help you make decisions concerning bonuses, investments, or other earnings. The marginal rate will inform you of the top tier of your tax rate.

What Is the Effective Tax Rate?

The effective tax rate is the average rate you’ll pay on all your income. It gives you a more accurate picture of your tax burden.

To find your effective rate, divide your total tax liability by your total taxable income and multiply by 100.

So, Frank, with $50,000 in income and a $5,914 tax liability, would have an effective tax rate of 11.83 percent. In other words, 11.83 percent of Frank’s income would go toward paying federal taxes.

Can Tax Credits Lower Your Marginal Tax Rate?

Tax credits like the Child Tax Credit will not lower your marginal tax rate. The Child Tax Credit under the One Big Beautiful Bill Act for 2025 is $2,200—with adjustments for inflation—according to the U.S. House Committee on Ways and Means.This tax credit isn’t used to lower your income; it reduces your tax liability. So, using Frank’s tax liability amount of $5,914, he could apply the tax credit and now owe $3,714.

How to Lower Your Marginal Tax Rate

There are several ways to lower your marginal tax rate. Start with maximizing your retirement contributions. You can lower your taxable income dollar-for-dollar with yearly contributions to a 401(k), a traditional IRA, or other retirement accounts.

For example, the maximum 401(k) limit in 2025, according to the IRS, is $23,500, and the traditional IRA limit is $7,000.

Health savings accounts (HSAs) can also help lower your taxable income. According to the IRS, an individual with self-only coverage under a high deductible health plan can contribute a maximum of $4,300 to an HSA.

If you expect a large bonus at the end of the year, you may want to consider deferring it to next year. This especially works if you anticipate an income reduction in the future. You may want to ask to defer a severance if you are laid off. In fact, any payments that you could defer may help reduce your marginal tax rate.

If you must take a required minimum distribution (RMD), which could affect your marginal tax rate, consider donating to charity. Eligible IRA owners can make a qualified charitable distribution (QCD) up to $108,000 per individual for tax year 2025, according to the IRS. Payments must be made directly from the IRA to the qualified charity in order to avoid the amount being applied to your income.

Marginal Tax Rate Determines Additional Amount Paid

The marginal tax rate helps you think about future earnings. For example, if you are considering taking a new job with a large pay raise, it may push you into a higher marginal tax rate. You should know what that will be so you can understand the tax implications.

Likewise, if you are anticipating selling something for a profit, knowing your marginal tax rate can help you determine when to sell.

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