Marginal Tax Rate

The federal income tax is progressive, meaning income is taxed in layers called brackets, each with its own rate. Your marginal tax rate is the rate on the highest layer your income reaches, so it is the rate you would pay on one more dollar of income or save on one more dollar of deduction. If you are in the 22 percent bracket, a $1,000 raise is taxed at 22 percent, not your whole income.

Marginal rate is the number to use for decisions at the edge: whether a traditional or Roth contribution makes more sense, what a bonus actually nets you, or how much a deduction is worth. It is almost always higher than your effective rate, because the early brackets tax part of your income at lower rates. Our paycheck playbook and capital gains playbook both show the marginal rate at work.