What is the Marginal Tax Rate? Meaning, Steps to Calculate, and How to Lower It

Understanding taxes completely is not an easy job, and when it involves words like “marginal tax rate” and “effective tax rate,” it makes things even more confusing. However, knowing these concepts, especially about the marginal tax rate, is extremely crucial for the taxpayers, as it explains where their additional hard-earned money goes and how it can be saved. 

This key concept not just gives numbers but also helps in renegotiating salaries, choosing better financial strategies, and understanding investments. If you want to learn what is a marginal tax rate, how it works, and how to calculate your taxes based on your income, skim through as we explain the concept in detail. 

What is Marginal Tax Rates? 

Marginal tax is the percentage of tax charged on your final dollar of income. The percentage of tax every taxpayer has to pay is on the additional income and not on the whole paycheck. This method is based on the progressive taxation principle, practiced in most countries, where tax rates increase as income increases. 

To put it simply, even if you have a higher income, you won’t be taxed at the highest rate on your entire earnings, but only on a portion. Every taxation level has a rate of tax, and the highest rate assigned to your highest taxation bracket is referred to as your marginal tax rate. 

How Marginal Tax Rates Work?

The marginal tax rate definition is based on the principle that your income is not taxed all at once. Meaning, with an increase in income, there is a division into various tax brackets with varying rates. 

In simple terms, you only pay a higher rate on the amount you make in the higher category and not on all your income. 

Let’s take an example to understand: Suppose the US tax brackets are: 

• 10% tax on income up to $11,600.
• 12% tax on earnings from $11,600 to $47,150.
• 22% tax on income from $47,151 to $100,525. 

Now, in case your earnings are $50,000. The first $11,600 will be taxed at 10%, the next $35,500 will be taxed at 12% and the remaining money will be taxed at 22%. So, you won’t be paying the higher tax bracket of 22% over your entire income, but only for the extra income. Marginal tax rates help to keep the tax system fair and balanced through the division of income. 

Now that, with the example given in this section, you know how the tax rates are divided, let’s go ahead and check the marginal tax rate adjustments for 2025 and 2026. 

Also Read: UK Tax Year: A Branded Guide to Stay Compliant with Tax Regulations

Marginal Tax Rate Adjustments: Year 2025 and 2026 

Every year, the IRS makes tax inflation adjustments with new thresholds to ensure that taxpayers are not pushed to pay higher fees only because of rising inflation. 

See what is marginal tax rates for 2025: 

Marginal Tax Rates	Single filers	Married couples	Head earning member of the family
10%	$0 to $11,925	$0 to $23,850	$0 to $17,000
12%	$11,925 to $48,475	$23,850 to $96,950	$17,000 to $64,850
22%	$48,475 to $103,350	$96,950 to $206,700	$64,850 to $103,350
24%	$103,350 to $197,300	$206,700 to $394,600	$103,350 to $197,300
32%	$197,300 to $250,525	$394,600 to $501,050	$197,300 to $250,500
35%	$250,525 to $626,350	$501,050 to $751,600	$250,500 to $626,350
37%	Income above $626,350	Income above $751,600	Income above $626,350

Here’s what the rates of marginal tax definition will be for the financial year 2026:

Marginal Tax Rates	Single filers	Married couples	Head earning member of the family
10%	$0 to $12,400	$0 to $24,800	$0 to $17,700
12%	$12,400 to $50,400	$24,800 to $100,800	$17,700 to $67,450
22%	$50,400 to $105,700	$100,800 to $211,400	$67,450 to $105,700
24%	$105,700 to $201,755	$211,400 to $403,550	$105,700 to $201,750
32%	$201,755 to $256,225	$403,550 to $512,450	$201,750 to $256,200
35	$256,225 to $640,600	$512,450 to $768,700	$256,200 to $640,600
37%	Income above $640,600	Income above $768,700	Income above $640,600

How to Find Marginal Tax Rate?

Calculating the marginal tax rate seems to be complex, but it is very easy once you learn the concept of tax brackets. The tax rate is the percentage of tax that is paid on the highest part of your earnings. 

We have written a step-by-step calculation method below: 

Step 1: Check Your Taxable Income

First step is to check your annual income, business profits, bonuses, and investment profits. After that, calculate the difference between them and all the allowable deductions like retirement benefits, standard or itemized deductions, and more. 

Step 2: Check Which Tax Bracket You Fall In 

Check the current year tax adjustment rates from the IRS, and based on your taxable income, see which percentage bracket you fall in. 

For example, if your taxable earnings are $80,000, they are placed in the 22% bracket. This shows that your marginal tax rate is 22 percent. 

Step 3: Understand Effective Tax Rate 

Calculation of the marginal tax rate is not completed unless you know the difference between the marginal tax vs effective tax rates. The first one is the rate at which you pay for the highest part of your income; effective tax, on the other hand, is the average percentage that you pay on all your income. 

Let’s say you earn $85,000 annually. So, your marginal tax rate is 22% based on the current tax chart. However, not all your earnings are taxed at 22%; they will be divided into 10%, 12%, etc. To get your effective tax rate, you need to divide your total income by total tax; the result will be the total amount of tax you will actually pay. 

Marginal Tax Rate Vs Effective Tax Rate

The marginal tax rate is the percentage of tax paid on your last dollar of income, and the effective tax rate is the average tax that you pay on the income earned. The marginal rate informs you that you would pay an extra tax because of the additional earnings. The effective tax rate is your actual tax burden that you need to pay overall. 

For example, you are a businessperson making $80,000 annually, and the final part of your income falls in the 22% tax bracket of marginal tax. However, when you add all your total taxes and then divide by $80,000, you will have a real tax rate of only 15-16% since not all your income will be taxed at 22%. 

Also Read: Washington Sales Tax: Learn About Local and Washington Sales Tax Rate, Nexus Laws, and Filing Requirements

Marginal Tax Rate Vs Flat Tax Rate 

Marginal tax definition follows a progressive taxation system, i.e., the higher the income, the higher the tax rates become, and the higher percentage is paid by the high-income earners. 

A flat rate tax system, on the other hand, will impose the same tax rate on all income earners. It charges the same rate, regardless of the amount of income earned. 

For example, the current US tax system has a marginal taxation rule where various amounts of income are charged at varying tax rates of 10%, 12%, 22%, and so on. However, if a flat tax system imposes a tax rate of 15% on the entire earnings, no matter whether your income is $30,000 or $300,000, you would have to pay a standard 15%. 

How to Lower Your Marginal Tax Rate?

Lowering your marginal tax rate meaning is an intelligent move that helps in making the most of the available deductions, exemptions, and credits. You cannot alter the taxable brackets, but it is legal to reduce the amount of taxable income. 

Here are some useful methods to reduce the rate of marginal tax: 

• Make Contributions to Retirement Plans: The contributions to accounts such as 401(k), IRA, or HSA are usually tax-deductible, reducing your taxable income. 

• Claim Deductions and Credits: Certain deductions, like mortgage interest, charitable deductions, and education expenses, are tax-exempt contributions. 

• Invest in Tax-Saving Options: You can get a tax-saving mutual fund, municipal bonds, Roth IRAs, and other tax-free investment options to lower your taxable income. 

• Optimize Your Tax Filing: According to the IRS, married couples can file taxes together, which lowers their combined percentage. You must find such loopholes and use them to reduce the overall percentage. 

Wrapping Up!

Marginal tax rate is one of the most important aspects of financial planning. Not only does it assist you in determining the amount of tax that you will pay, but it also allows you to make sound judgments concerning investments, timing of income, and deductions. 

Please note that an increase in the marginal tax rate does not mean you will have to pay a large percentage of your income towards taxes, but it only applies to the income that is within the higher bracket. 

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