Marginal Tax Rate

Your marginal tax rate is the percentage you'll pay on the next dollar you earn. It's critical for financial decisions like taking a raise, doing a Roth conversion, or selling investments.

Why It's Different from Effective Rate:

• Marginal Rate: Tax on your NEXT dollar earned
• Effective Rate: Average tax across ALL income

Example:

• Single filer earning $60,000
• Marginal rate: 22% (your tax bracket)
• Effective rate: 13.5% (actual average)

This means:

• A $10,000 bonus is taxed at 22% = $2,200 tax
• NOT 13.5% (that's just your average)

Decision-Making Applications:

1. Roth vs. Traditional IRA:

• If marginal rate is 24%+ → Traditional IRA saves more now
• If marginal rate is 12% or less → Roth IRA is better

2. Tax-Loss Harvesting:

• If you're in 22%+ bracket, capital gains are taxed at 15%
• Marginal rate > capital gains rate = tax advantage to harvesting

3. Bonus vs. 401(k) Contribution:

• $10,000 bonus at 24% bracket = $7,600 take-home
• Contribute to 401(k) instead = full $10,000 grows tax-free

State + Federal Combined: Your true marginal rate includes state income tax:

• Federal: 22%
• California state: 9.3%
• Combined marginal rate: 31.3%

Bracket Management: If you're near a bracket threshold ($103,350 for 24% bracket), consider:

• Deferring income to next year
• Accelerating deductions into current year
• Strategic Roth conversions in low-income years