Marginal Tax Rate

Your marginal tax rate is the rate applied to your next dollar of income. It is the rate of the highest tax bracket your taxable income reaches.

If your taxable income after the standard deduction falls in the 12% federal bracket, earning $1,000 more raises federal income tax by $120. State tax and the 7.65% for FICA come on top, so the full cost of that $1,000 is higher.

The marginal rate decides what a deduction saves you. A $1,000 pre-tax deduction saves $120 of federal income tax at 12% and $220 at 22%. Compare it with your effective tax rate, and see how a 401(k) plays out at your rate.