The marginal tax rate is the percentage of tax you pay on the next dollar of income you earn. It applies only to the additional income above your current earnings, not your entire income. In progressive tax systems, income is taxed in brackets, so different portions of your income are taxed at different rates. For example, if your earnings fall into multiple tax brackets, your income up to a certain limit is taxed at the lower bracket rate, and only the income above that limit is taxed at the higher bracket's marginal rate. Thus, your marginal tax rate is the rate applied to the last dollar of income you earn. To put it simply: if your marginal tax rate is 22%, you pay 22 cents in tax for every extra dollar you earn above a certain threshold. This is distinct from your average tax rate, which is the total tax you pay divided by your total income. This concept ensures that as your income increases, the additional income is taxed at progressively higher rates, while income below the threshold remains taxed at lower rates. This approach helps in creating a fairer distribution of tax burdens across different income levels. For example, in the U.S. for 2024, if you have taxable income placing you in the 22% bracket, your first dollars are taxed at 10%, the next portion at 12%, and only the income above the higher threshold is taxed at 22%, which is your marginal tax rate on that extra income. This system means your total tax bill is lower than if all your income were taxed at the highest rate you reach, highlighting the progressive nature of marginal tax rates.
