How much can I earn before I need to pay Income Tax? What percentage of my income goes to taxes? How can I calculate the amount that I owe in taxes?
These are some of the common mind-boggling questions that are asked by taxpayers out of confusion when doing taxes. To facilitate, the IRS created tax brackets so people can estimate how much they’ll need to pay in taxes each year. Let’s learn more about these tax brackets before we cover 2021 Federal Income Tax Rates.
In the United States, your entire income is not subject to a single tax rate. Rather, there is a range of tax rates levied on different portions of your “taxable income”— your adjusted gross income (AGI) minus allowable itemized or standard deductions. Your taxable income includes earned income such as wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.
In essence, there are a number of different tax rates and the income levels at which they apply. This correlation results in a “tax bracket” that primarily refers to a range of taxable incomes subject to a certain income tax rate.
The US follows a progressive tax system, which means that as your income increases, the amount payable for taxes will also rise progressively. Subsequently, at present, there are seven tax brackets with federal tax rates for 2021: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Individuals with a low income fall into tax brackets with relatively low income tax rates, while the higher earners fall into brackets with higher rates applying to the higher portions of their income. However, it’s not just the taxable income that will determine what bracket you’ll be in. Your filing status is another determinant giving you four different choices based on your marital status and family situation: single filers, married filing jointly or qualifying widow(er), married filing separately, and head of household.
In the 2020 tax year, for example, the taxpayers who are single with a taxable income of $9,875 or less will be taxed at 10 percent for their 2021 federal income taxes. However, as taxable income increases, it will be subject to tax rates of 12, 22, 24, 32, 35, or 37 percent such that the higher rates only apply to the higher portions of their income. The tax bracket where the top portion of your dollars lands into is your marginal tax bracket, corresponding to the highest tax rate, applying to the higher portion of your income.
Let’s have a look at the tax brackets for tax years 2020 and 2021, and find out how you can determine what bracket you’ll fall into, and how much you owe in your 2021 Federal Income Taxes.
|Tax Rate||Single||Married Filing Jointly or Qualifying Widow||Married Filing Separately||Heads of Households|
|10%||$0 to $9,875||$0 t0 $19,750||$0 to $9,875||$0 to 14,100|
|12%||$9,876 to $40,125||$14,101 to $53,700||$19,751 to $80,250||$9,876 to $40,125|
|22%||$40,126 to $85,525||$53,701 to $85,500||$80,251 to $171,050||$40,126 to $85,525|
|24%||$85,526 to $163,300||$85,501 to $163,300||$171,051 to $326,600||$85,526 to $163,300|
|32%||$163,301 to $207,350||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350|
|35%||$207,351 to $518,400||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $311,025|
|37%||$518,401 or more||$518,401 or more||$622,051 or more||$311,026 or more|
|Tax Rate||Single||Married Individuals Filing Joint Returns||Married filing separately||Heads of Households|
|10%||$0 to $9,950||$0 to $19,900||$0 to $9,950||$0 to $14,200|
|12%||$9,951 to $40,525||$19,901 to $81,050||$9,951 to $40,525||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$40,526 to $86,375||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,376 to $164,925||$86,351 to $164,900|
|32%||$164,926 to $209,425||$329,851 to $418,850||$164,926 to $209,425||$164,901 to $209,400|
|35%||$209,426 to $523,600||$418,851 to $628,300||$209,426 to $314,150||$209,401 to $523,600|
|37%||$523,601 or more||$628,301 or more||$314,151 or more||$523,601 or more|
Comparing your salary to the brackets shown above, it may seem easy to know your tax rate to calculate your 2020 and 2021 Federal Income Taxes. But, it’s not that simple. Your tax bracket does not actually reflect how much you owe in total taxes. You have to go through more than one bracket to know your tax rate.
For example, if you are single and have taxable income of $375,000 in 2020, then you are in the 35 percent bracket for your federal income tax 2021.
However, in effect, it’s not 35 percent that will apply on all taxable income of yours. Rather, it will be as follows:
The first $9,875 is taxed at 10%: $9,875 x 0.10 = $987.50
Then $987.50 plus 12% of the excess over $9,875
$4,617.50 plus 22% of the excess over $40,125
$14,605.50 plus 24% of the excess over $85,525
$33,271.50 plus 32% of the excess over $163,300
$47,367.50 plus 35% of the excess over $207,350
$156,235 plus 37% of the excess over $518,400
Now, consider the case of a single filer, let’s call him Joseph, with a taxable income of $50,000 in 2020, and calculate his tax obligation:
The first $9,875 is taxed at 10%: $9,875 x 0.10 = $987.50
The next $30250, is taxed at 12%: $30,250 x 0.12 = $3,630
Finally, the remaining income is taxed at 22%: $10,524 x 0.22 = $2,172.501
Adding the taxes owed in each of the brackets, Joseph gets the total tax amount:
$987.50 + $3,630 + $2,172.50 = $6,790.
Divide that by his earnings of $50,000 and he gets an effective tax rate of 13.5 percent, which is lower than the 22 percent marginal bracket that’s he’s in. We can see here that Joseph’s entire taxable income of $50,000 is not taxed at 22%. Instead, some of his income is subjected to lower tax brackets of 10% and 12%. As his income increases, so do his taxes.
Your 2021 federal income tax bracket may not remain the same in 2022. Each year, the IRS adjusts the tax brackets in order to account for inflation, using the Consumer Price Index (CPI). So, do make sure you check your 2021 federal income tax liability if you are still following the previous year’s tax bracket.
After the tax code saw an overhaul under The Tax Cuts and Jobs Act of 2017, standard deductions almost doubled. Such higher standard deductions will reduce the number of taxpayers who itemize deductions. The standard deductions for each filing status for 2021 federal income taxes are:
Head of household: $18,800
Married filing separately: $12,550
Married filing jointly: $25,100
Qualifying widow(er): $25,100
Arriving at your taxable income requires some arithmetic. If the numbers and their calculations are confusing you, it is wise to talk to a tax consultant and take their expert advice. We, at Monily, can help you navigate through the entire process of knowing your tax obligations for 2021 Federal Income Tax. We can also help you save money in taxes this year and ahead.
See Also: 10 Tax Preparation Tips For 2021