Salary FYI

Marginal Tax Rate

Tax

The tax rate applied to the last dollar (or unit of currency) of income earned, corresponding to the highest tax bracket into which an individual's income falls.

## Marginal Tax Rate

The marginal tax rate is the rate paid on the next dollar of income. In a progressive system, it equals the rate of the taxpayer's highest bracket.

### Marginal vs. Effective Rate

| Concept | Definition | Example ($100K income, US) |
|---------|-----------|---------------------------|
| Marginal rate | Rate on last dollar | 22% |
| Effective rate | Total tax ÷ Total income | ~17.5% |

### Why It Matters

The marginal rate determines the tax impact of earning additional income, making a bonus, or realizing capital gains. It is the relevant rate for financial decisions like contributing to a pre-tax retirement account (which reduces taxable income at the marginal rate).

### Misconception

A common misconception is that moving into a higher bracket means all income is taxed at the higher rate. In reality, only the income above the bracket threshold is taxed at the new rate. Earning more always results in higher after-tax income.