Chime® is a financial technology company, not a bank. Banking services, credit, and debit card provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.

What Is a Marginal Tax Rate?

Chime Team • March 27, 2024

Marginal Tax Rate

The marginal tax rate is a critical concept within finance, signifying the tax rate paid at a person’s highest dollar of income earned. This rate is a cornerstone of progressive tax systems, where taxpayers are divided into income brackets, with each bracket being taxed at a different rate. As income rises, so does the marginal tax rate applied to the income exceeding the threshold of the current bracket. As a result, these tax rates do not affect the tax rates of income within the lower brackets.

For example, if an individual taxpayer earns an additional amount of income that pushes them from a 20% tax bracket into a 25% tax bracket, only the income above the threshold of the 20% bracket is taxed at the 25% rate. Not the entire income. This is crucial because it means that earning more money will not result in less net income due to higher taxes on all income.

Understanding one’s marginal tax rate is important for several reasons. First of all, it aids in making more informed financial decisions, such as investment choices or whether to pursue additional income opportunities. Secondly, knowing your marginal tax rate can help you strategize around tax deductions and credits to minimize your overall tax liability.

In personal finance, the marginal tax rate affects decisions related to savings, investments, and retirement planning. For instance, deciding between a Roth IRA and a traditional IRA might depend on whether you expect your marginal tax rate to be higher or lower at retirement. Additionally, understanding how additional income from a side job or freelance work will be taxed helps in evaluating the true value of that work.

Marginal tax rate plays a significant role in economic policy and tax reform debates. It influences work incentives, consumer spending, and overall economic growth. Critics argue that very high marginal tax rates can discourage work and investment, while proponents of progressive taxation view it as a tool for reducing income inequality.

In summary, marginal tax rates highlight the progressive nature of tax systems, where higher income leads to higher tax rates on incremental earnings. Understanding your marginal tax rate not only helps in optimizing tax outcomes but also in making informed financial decisions that align with personal goals and circumstances.

Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card and the Chime Credit Builder Visa® Credit Card are issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit and credit cards are accepted. Please see the back of your Card for its issuing bank.

While Chime doesn’t issue personal checkbooks to write checks, Chime Checkbook gives you the freedom to send checks to anyone, anytime, from anywhere. See your issuing bank’s Deposit Account Agreement for full Chime Checkbook details.

By clicking on some of the links above, you will leave the Chime website and be directed to a third-party website. The privacy practices of those third parties may differ from those of Chime. We recommend you review the privacy statements of those third party websites, as Chime is not responsible for those third parties' privacy or security practices.

Third-party trademarks referenced for informational purposes only; no endorsements implied.

‡ SpotMe® for Credit Builder is an optional, no interest/no fee overdraft line of credit tied to the Secured Deposit Account. SpotMe on Debit is an optional, no fee service attached to your Chime Checking Account (individually or collectively, “SpotMe”). Eligibility for SpotMe requires $200 or more in qualifying direct deposits to your Chime Checking Account each month.

Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

Address: 101 California Street, Floor 5, San Francisco, CA 94111, United States.

No customer support available at HQ. Customer support details available on the website.

© 2013-2024 Chime Financial, Inc. All rights reserved.