DayCents

Marginal Tax Rate

Your marginal tax rate is the rate you pay on your last dollar of income — the tax bracket your top dollar falls into. Because the US uses progressive brackets, it's higher than your effective (average) rate: moving into a higher bracket only taxes the income above that threshold, never your whole income.

The marginal rate is the right number for decisions at the edge — whether a pre-tax 401(k) contribution or a deductible IRA is worth it, since each deducted dollar saves tax at that top rate. The effective rate better describes your overall tax burden.