The marginal tax rate is the rate of tax you pay on your next dollar of income. It's a crucial concept in personal finance and tax planning because it tells you how much of any additional income (like from a raise, bonus, or side hustle) will actually go into your pocket after taxes.
Unlike your *average* tax rate (total tax paid divided by total taxable income), the marginal tax rate applies only to the income earned at the highest tax bracket you fall into. Tax systems are progressive, meaning higher income levels are taxed at higher rates.
How to Calculate Your Marginal Tax Rate
The calculation is straightforward:
Determine your current total taxable income.
Estimate what your total taxable income would be if you earned just one more dollar (or a small, incremental amount).
Calculate the difference in tax paid between these two income levels.
Divide that difference in tax by the difference in income (which is typically $1).
Using the formula:
Marginal Tax Rate = (Tax on Income + $1 - Tax on Income) / $1
This is equivalent to simply calculating the tax on that *additional* dollar.
Using This Calculator
This calculator simplifies the process. Enter:
Your Taxable Income: This is your adjusted gross income minus any deductions.
Income if Earned One More Dollar: This is simply your current taxable income plus $1 (or any small increment you wish to test).
The calculator will then determine the difference in tax liability and present your marginal tax rate.
Why is the Marginal Tax Rate Important?
Investment Decisions: Knowing your marginal rate helps you evaluate after-tax returns on investments. For example, if your marginal rate is 24%, a dividend yielding 3% will only provide a 2.28% after-tax yield (3% * (1 – 0.24)).
Income Planning: It informs decisions about taking on extra work, negotiating raises, or timing income realization. If your marginal rate is very high, you might prioritize tax-advantaged savings or deferring income.
Tax-Loss Harvesting: Understanding the tax savings from capital losses is easier when you know the rate at which those losses offset income.
Charitable Contributions: The tax deduction value of charitable donations depends on your marginal tax rate.
Remember, this calculator provides the federal marginal tax rate based on the inputs you provide. State and local taxes are separate and will affect your total tax burden. Always consult with a qualified tax professional for personalized advice.
function calculateMarginalTaxRate() {
var taxableIncome = parseFloat(document.getElementById("taxableIncome").value);
var nextDollarIncome = parseFloat(document.getElementById("nextDollarIncome").value);
var resultDiv = document.getElementById("result");
var resultSpan = resultDiv.querySelector("span");
if (isNaN(taxableIncome) || isNaN(nextDollarIncome) || taxableIncome < 0 || nextDollarIncome < 0) {
alert("Please enter valid positive numbers for both income fields.");
resultDiv.style.display = 'none';
return;
}
if (nextDollarIncome 0) {
marginalRate = (taxDifference / incomeDifference) * 100;
}
// Ensure the rate is within a reasonable percentage range
if (marginalRate 100) marginalRate = 100; // Cap at 100%
resultSpan.textContent = marginalRate.toFixed(2) + "%";
resultDiv.style.display = 'block';
}
// *** HYPOTHETICAL TAX CALCULATOR FUNCTION ***
// This function is a placeholder to demonstrate the calculation.
// It does NOT represent actual US federal income tax brackets.
// A real calculator would need precise tax bracket data for the relevant tax year.
function hypotheticalTaxCalculator(income) {
var tax = 0;
if (income <= 10000) {
tax = income * 0.10;
} else if (income <= 40000) {
tax = (10000 * 0.10) + (income – 10000) * 0.12;
} else if (income <= 85000) {
tax = (10000 * 0.10) + (30000 * 0.12) + (income – 40000) * 0.22;
} else if (income <= 160000) {
tax = (10000 * 0.10) + (30000 * 0.12) + (45000 * 0.22) + (income – 85000) * 0.24;
} else if (income <= 200000) {
tax = (10000 * 0.10) + (30000 * 0.12) + (45000 * 0.22) + (75000 * 0.24) + (income – 160000) * 0.32;
} else if (income <= 500000) {
tax = (10000 * 0.10) + (30000 * 0.12) + (45000 * 0.22) + (75000 * 0.24) + (40000 * 0.32) + (income – 200000) * 0.35;
} else {
tax = (10000 * 0.10) + (30000 * 0.12) + (45000 * 0.22) + (75000 * 0.24) + (40000 * 0.32) + (300000 * 0.35) + (income – 500000) * 0.37;
}
return tax;
}