Get to know the author“What are marginal tax rates?”
This query introduces a fundamental yet often misunderstood element of global tax systems.
Marginal tax rates, require a nuanced understanding to fully appreciate their impact on individual fiscal responsibilities.
In the following article, we will define marginal tax rates, introduce strategies to potentially reduce your marginal tax rate, and offer tailored insight for expatriates with US tax obligations.
Tax systems and marginal tax rates
US expatriates must understand how marginal tax rates work, regardless of where they live. That’s because they’re a staple of the US tax system — and due to the US’s citizenship-based taxation system, all permanent residents and citizens who meet the minimum income threshold are subject to federal income taxes (even if they live abroad).
As a result, even expatriates currently living in countries that don’t impose income taxes — such as the United Arab Emirates — would do well to understand marginal tax rates. Not only will this help them better understand their tax obligations — it will also allow them to better optimize their tax strategy.
Defining marginal tax rates
Marginal tax rates refer to the tax percentages applied to every dollar of income earned beyond a certain threshold.1 Many countries use marginal tax rates in conjunction with a progressive tax system, in which there is a wide range of marginal rates according to different levels of income.
Under progressive tax systems, as your income rises, your tax rate increases. Conversely, as your income falls, your tax rate decreases.
Difference between marginal tax rate and effective tax rate
The term “effective tax rate” frequently surfaces in conversations around marginal tax rates as well. This phrase refers to the true percentage at which your income is taxed, as opposed to the marginal tax rate applied to your income.
Granted, these concepts can seem quite abstract without context. To understand the nuances of marginal tax rates and effective tax rates, let’s walk through a few concrete examples.
What are the marginal tax rates for 2023?
The US marginal tax rates for the 2023 tax year — in other words, the taxes you’ll file in 2024 — are 10, 12, 22, 24, 32, 35, and 37 percent. Those taxpayers in the lowest brackets of income pay the lowest tax rates, while those bringing in the highest amount of income pay the highest tax rates.
US Marginal Tax Rates for 2023 Tax Year2
| Tax Rate | Single or Married filing separately | Married filing jointly | Head of household |
|---|---|---|---|
| 10% | $0 – $11,000 | $0 – $22,000 | $0 – $15,700 |
| 12% | $11,001 – $44,725 | $22,001 – $89,450 | $15,701 – $59,850 |
| 22% | $44,726 – $95,375 | $89,451 – $190,750 | $59,851 – $95,350 |
| 24% | $95,376 – $182,100 | $190,751 – $364,200 | $95,351 – $182,100 |
| 32% | $182,101 – $231,250 | $364,201 – $462,500 | $182,101 – $231,250 |
| 35% | $231,251 – $578,125 | $462,501 – $693,750 | $231,251 – $578,100 |
| 37% | $578,126+ | $693,751+ | $578,101+ |
For this example, let’s say you’re a US citizen and single filer earning taxable income of $80,000 per year. At this income level, you fall into the 22% income tax bracket.
Contrary to what you might think, you won’t pay 22% of your income ($17,600) in federal income taxes. Instead, your tax obligations will add up according to the aforementioned US marginal rate of taxation. For our single filer with an income of $80,000, this looks like:
- 10% on the first $11,000 of your income: $1,100
- 12% on the next $33,725 of your income: $4,047
- 22% on the remaining $35,275 of your income: $7,760
In total, you would owe $12,907 ($1,100 + $4,047 + $7,760) in income taxes. This is significantly less than the $17,600 you would owe if you were subject to a flat tax rate of 22%.
To calculate your effective tax rate, you can divide the total you owe in taxes by your total taxable income. In the example above, the effective tax rate is about 16.13% ($12,907 ÷ $80,000).
Note: These figures are for illustrative purposes of this very specific and simplified example only and do not take additional taxes, credits, or deductions into account.
Pro tip:
While it’s typically beneficial for married US couples to file their US taxes jointly, US expatriates married to non-US citizens with no US tax filing obligations are actually most often better off filing separately. (3)
Lowering marginal tax rate in the US
It’s worth noting that there are several ways to lower your taxable income, thereby lowering the amount you owe to the IRS in taxes. Tax deductions, for example, may shift you into a lower tax bracket, which can drastically reduce your tax bill.
One method of lowering your taxable income that is allowed to almost all taxpayers is claiming the standard deduction. The standard deduction allows single filers and married persons filing separately to deduct $13,850 from their total taxable income. Married couples filing jointly, on the other hand, can deduct $27,700, while heads of household can deduct a full $20,800.4 (Note: These numbers refer to the 2023 tax year, or taxes to be filed in 2024.)
An alternative to the standard deduction that also works to lower taxable income is claiming itemized deductions (e.g. medical expenses, charitable deductions, and property taxes, among others). Generally, people take this approach when their itemized deductions add up to more than the standard deduction. That being said, the right approach for you will depend on your unique situation and may even change year to year.
When in doubt, consult a professional in US expat taxes.
What are the marginal tax rates for 2024?
The specific tax rates and dollar amounts associated with them vary from year to year due to factors like inflation and changes to tax legislation. For the 2024 tax year — in other words, the taxes you’ll file in the 2025 calendar year — the marginal tax rates are as follows.
US Marginal Tax Rates for 2024 Tax Year5
| Tax Rate | Single or Married filing separately | Married filing jointly | Head of household |
| 10% | $0 – $11,600 | $0 – $23,200 | $0 – $16,550 |
| 12% | $11,600 – $47,150 | $23,200 – $94,300 | $16,550 – $63,100 |
| 22% | $47,150 – $100,525 | $94,300 – $201,050 | $63,100 – $100,500 |
| 24% | $100,525 – $191,950 | $201,050 – $383,900 | $100,500 – $191,950 |
| 32% | $191,950 – $243,725 | $383,900 – $487,450 | $191,950 – $243,700 |
| 35% | $243,725 – $609,350 | $487,450 – $731,200 | $243,700 – $609,350 |
| 37% | $609,350+ | $731,200+ | $609,350+ |
An expatriate example: US taxpayer living and paying taxes in England
As mentioned earlier, many different countries in the world employ marginal tax rates — including the United Kingdom. For this example, we’ll analyze how marginal tax rates would work for a US expatriate living in England.
Below are the marginal tax rates for the UK in the 2023 tax year (which apply to the taxes you will file in 2024).
UK Marginal Tax Rates for 2023 Tax Year6
| Band | Taxable income (GBP) | Taxable income (USD) | Tax rate |
| Personal Allowance | £0 – £12,570 | ~$0 – $15,760 | 0% |
| Basic rate | £12,571 – £50,270 | ~$15,761 – $63,025 | 20% |
| Higher rate | £50,271 – £125,140 | ~$63,026 – $156,892 | 40% |
| Additional rate | £125,140+ | ~$156,892+ | 45% |
Notice that the first band, personal allowance, has a tax rate of 0%. Here, the personal allowance functions similarly to the standard deduction in the US; it allows you to deduct a certain amount from your total taxable income.
In the UK tax system, if your total income is between £100,00 – £125,140, the personal allowance is reduced by £1 for every £2 by which your income exceeds £100,000. The personal allowance is fully removed if your total income exceeds £125,140.
The marriage allowance lets married couples and civil partners transfer up to £1,260 (~$1,580 USD) of their personal allowance to their spouse or civil partner. This can reduce their spouse’s or civil partner’s tax bill by up to £252 (~$316 USD).7 To benefit from the marriage allowance, the giver’s income must be less than £12,570 and the receiver’s income must be less than £50,270.
How to calculate marginal tax rate
Calculating your marginal tax rate in the UK isn’t too dissimilar from calculating your marginal tax rate in the US. In this case, we’ll examine a US citizen single filer earning £60,000 (~$75,226 USD). Under the UK’s Pay as You Earn (PAYE) system, this taxpayer would owe:
- 0% on the first £12,570 (~$15,760 USD) of their income: £0 ($0 USD)
- 20% on the next £37,700 (~$47,280 USD) of their income: £7,540 (~$9,455 USD)
- 40% on the remaining £9,730 (~$12,205 USD) of their income: £3,892 (~$4,881 USD)
Thus, their total tax bill would be £11,432 (£0 + £7,540 + £3,892), or roughly $14,336 USD ($0 + $9,455 + $4,881), in UK income taxes.
Pro tip:
To use the marriage allowance, one spouse must earn less than £12,570 (the giver) and the receiving spouse must earn less than £50,270. As such, many individuals do not qualify.
How to lower marginal tax rate (UK)
Much like in the US, the UK offers certain deductions and credits that allow taxpayers to lower their taxable income — and possibly even end up in a lower tax bracket. A few ways of restructuring your income that may lower your marginal tax rate (besides claiming the personal allowance and marriage allowance that we discussed above) include:
Contributing to your personal pension
Another way to significantly lower your taxable income in the UK — and as a result, your marginal tax rates — is by directing your pre-tax income toward your personal pension. In the UK, individuals can contribute to multiple personal pension accounts, but to remain tax-free, the sum of those contributions must not exceed £60,000 (~$75,226 USD).
That being said, the personal pension limit may be lower in respect of taxpayers who are considered ‘high earners’. The pension limit becomes tapered once adjusted income is in excess of £260,000 and the pension limit is fully tapered once adjusted income is £360,000+. The minimum tapered limit is £10,000.
Making charitable contributions
Making charitable contributions is a win-win for those who value philanthropy and tax efficiency. Not only can it potentially reduce your taxable income, it also allocates funds to charitable causes. Typically, individuals claim charitable contribution tax relief by giving through the Gift Aid scheme or establishing a charitable trust.8
Charitable giving tax benefits in the UK aren’t quite as straightforward as they are in the US, however. In light of that, you may want to read up on how charitable tax relief in the UK works and/or speak with a UK tax professional to understand how feasible a tax mitigation strategy is.
References
- Marginal Tax Rate
- 2023-2024 Tax Brackets And Federal Income Tax Rates
- What Americans in the UK Need to Know About Marriage and Tax
- IRS provides tax inflation adjustments for tax year 2023
- 2024 Tax Brackets
- Income Tax rates and Personal Allowances
- Marriage Allowance
- How giving to charity can reduce your tax bill
