Marginal Tax Rate
The tax rate applied to the last dollar of income.
Your marginal tax rate is the rate applied to the next dollar of taxable income you earn. The US uses a progressive system where income is taxed in brackets—only the income within each bracket is taxed at that rate, not your entire income. Understanding your marginal rate is critical for evaluating the after-tax benefit of additional income or deductions.
Example
A business owner in the 24% marginal bracket earns an additional $10,000—the extra income is taxed at 24%, resulting in $2,400 in additional federal tax.
Why It Matters for Your Business
Your marginal rate tells you the exact tax cost of earning one more dollar and the exact tax savings of claiming one more dollar in deductions.
Related Terms
More Taxes Terms
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Tax Audit
An examination of tax returns by the IRS to verify accuracy.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Tax Deduction
An expense that reduces taxable income.
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