Marginal Tax Rate.
A definition, in plain English — with the books that teach it.
What it means
The marginal tax rate is the percentage of tax applied to the last dollar of taxable income — the rate at which additional income will be taxed. The U.S. uses a progressive tax system with brackets, so only income within each bracket is taxed at that bracket's rate. The marginal rate drives decisions about pre-tax contributions to retirement accounts, Roth conversions, additional consulting income, and capital gains timing — any strategy that moves income from one year to another should be evaluated against the marginal rate in each year.
Example
A single filer earns $95,000 in taxable income. The first $11,600 is taxed at 10%, income from $11,601–$47,150 at 12%, and income from $47,151–$100,525 at 22%. The marginal rate is 22%. A $5,000 traditional IRA contribution reduces taxable income to $90,000, saving $1,100 (22% × $5,000) in federal taxes.
