Marginal Tax Rate Law and Legal Definition
A marginal tax rate is the tax rate that applies to the last dollar of income earned by the tax payer. A marginal tax rate is generally used in a progressive tax scheme. This concept is useful in assessing the tax effect of receiving additional income or claiming additional deductions.
The marginal tax rate is very different from the average tax rate, which is the total tax paid as a percentage of total income earned.
The following is an example of a federal regulation defining the term:
Pursuant to 26 CFR 1.467-3, the term "marginal tax rate" means the percentage determined by dividing one dollar into the amount of the increase or decrease in the Federal income tax liability of the taxpayer that would result from an additional dollar of rental income or deduction.
