What is a "Marginal Tax Rate?"

This is a basic concept that should be understood as it is referred to on a regular basis. When you look it up, the definition almost always seems to include this: “The percentage of tax you pay on the last dollar you earned.” I’ve always thought of this wording as a bit funny.  While it is precise, it’s a bit too lawyer-speak for my taste. So let’s take a closer/better look…

As a side note, unless a post is marked as an advanced level article, I’m going to use simple numbers and fictitious tax brackets for the purpose of educating without confusing. :)

Our personal income tax system is designed to tax higher-income earners more than lower income earners. It does this by using “tax brackets”.  Let’s look at an example:

$0-$10,000       = 0% tax

$10,000-$20,000 = 10% tax

$20,000-$50,000 = 20% tax

$50,000-$75,000 = 30% tax

$75,000+           = 50% tax

In this case you can see that some earning under $10,000 pays no tax at all. The Marginal Tax Rate is the rate of tax payable in the highest tax bracket you fall into. SO: if you earned $60,000 your marginal tax rate would be 30%.  If you earned $100,000 your marginal tax rate would be 50%.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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