Marginal Tax Rate: What Does It Mean?

Your marginal tax rate is the percentage of tax you pay on the last dollar of income you earn, based on the federal income tax bracket that dollar falls into. Because the U.S. uses a progressive tax system, not all of your income is taxed at the same rate; lower earnings are taxed at lower rates and higher earnings at higher rates. For example, if you're in the 22% bracket, only the income that falls within that bracket is taxed at 22%, not your entire income. Understanding your marginal rate is useful when making decisions about things like retirement contributions, side income, or tax deductions, since it tells you how much a deduction is actually worth to you. It's often confused with your effective tax rate, which is your overall average rate across all income.