Marginal Tax Rate
The tax rate applicable to the next dollar of taxable income earned, determining the incremental tax impact of additional income or deductions.
Marginal Tax Rate
The tax rate applicable to the next dollar of taxable income earned, determining the incremental tax impact of additional income or deductions in progressive tax systems.
For instance, in 2023, a U.S. corporation with taxable income of $100,000 faces a flat 21% federal corporate tax rate, meaning each additional dollar of income is taxed at 21%. For an individual taxpayer with taxable income of $95,000, the federal marginal tax rate might be 24%, meaning each additional dollar earned is taxed at 24%.
The marginal tax rate differs from the effective tax rate (total tax paid divided by total taxable income). Understanding marginal rates is crucial for decision-making involving incremental income or deductions, such as evaluating new business opportunities, investment options, retirement planning, or accelerating/deferring income and expenses between tax years. In progressive tax systems, marginal rates increase as income rises across defined brackets, creating important planning considerations around timing and character of income.