What is the Marginal Tax Rate? All You Need to Know in 2025

Understanding the US taxation system can become difficult for many. There are seven tax brackets, ranging from 10% to 37%, with added standard deductions and a minimum alternative tax exemption. Additionally, there is the marginal tax rate. Taking all these factors into account, tax filers may become confused and miss filing their returns. In this case, tax software hosting could be your best choice to avoid these mistakes. However, many fail to understand how exactly the marginal tax rate operates. People often view it as an added extra tax, but it’s more than that.

Marginal tax is a certain percentage of tax taken out of the extra money you earn from the existing tax bracket. Meaning if you earn money and the tax stands at the 32% tax bracket, each dollar you earn will add an extra 32 cents until you reach your next tax rate bracket limit. This means that individuals with higher earnings bear a higher tax burden compared to those with lower incomes. This progressive marginal tax may seem minimal, but it adds an extra tax burden to filers. 

In this blog, we will learn what a marginal tax rate is, how to calculate it, and the marginal tax rate formula. Let us get into the topic and explore. 

What is the Marginal Tax Rate? An Overview

In simple terms, marginal tax rates function by dividing your taxable income into different segments called brackets. If you are in a particular tax bracket and your income increases, the bracket might change to a sudden rise in tax rate. To minimize this sudden effect, a step-wise tax liability is added as income rises. For example, if you are in the 22% tax bracket, and an increase in income brings you to the 24% tax bracket, that doesn’t mean you will pay 24% tax; you will only pay 24% tax for the extra dollar you earn in that tax bracket range. This follows the US government. A progressive tax system was introduced in 1862. 

Your marginal tax rate is determined using the federal tax bracket range, which currently stands between 10% and 37%. Remember that the marginal tax rate is always applied to the extra dollar you earn in the new tax rate bracket due to an increase in income. 

How to Calculate Marginal Tax Rate? A Simple Guide with Example

 

Tax System Around the World at a Glance:

Source: PWC world tax summaries

Final Words

It may sound difficult when it comes to calculating the marginal tax rate system, but if you get hold of it, you can easily file and understand the marginal tax system. The marginal tax rate is essentially a progressive tax system, where an increase in a person’s income leads to a progressive increase in tax. The growth is not phenomenal but marginal, so the name. In this blog, we have clearly and briefly shown how to calculate marginal tax with an example. We hope your doubts regarding the marginal tax rate are now cleared.

FAQs (Frequently Asked Questions)

Why is the marginal tax rate always the same or higher than the effective tax rate?

The marginal tax rate is always the same or higher than your effective tax rate because your income is taxed at different tax brackets or layers, which is also known as a progressive taxation system. 

What is the difference between the marginal and the effective tax rate?

The main difference is that the marginal tax rate is the percentage (%) you pay on the last dollar of your income earned, while the effective tax rate is the average percentage (%) you pay for your total revenue earned.