January marks not only the start of a new year but also a new tax season. The Internal Revenue Service (IRS) will begin accepting and processing 2021 tax returns in January of 2022, and this year, taxes are due by April 18, 2022.
If you’re starting to think about filing your taxes, you might be wondering how much you paid in taxes last year, and at what tax rate. The answer to that lies in tax brackets, which determine how much the federal government takes out of your paycheck.
But what are the tax brackets for tax year 2021? We’ve pulled together this list to make your tax season a little easier.
What are the tax brackets for 2021?
Federal income tax rates are decided by the level of income earned, with rates increasing in tiers or tax brackets. The tax bracket you fall into depends on both your filing status and your taxable income. The tax brackets for 2021 have increased in comparison to tax year 2020.
Here are the federal income tax brackets for tax year 2021:
|Tax rate||Single||Married filing separately||Married filing jointly||Head of household|
|10%||$0 - $9,950||$0 - $9,950||$0 - $19,900||$0 - $14,200|
|12%||$9,951 - $40,525||$9,951 - $40,525||$19,901 - $81,050||$14,201 - $54,200|
|22%||$40,526 - $86,375||$40,526 - $86,375
||$81,051 - $172,750||$54,201 - $86,350|
|24%||$86,376 - $164,925||$86,376 - $164,925||$172,751 - $329,850||$86,351 - $164,900|
|32%||$164,926 - $209,425||$164,926 - $209,425||$329,851 - $418,850||$164,901 - $209,400|
|35%||$209,426 - $523,600||$209,426 - $314,150||$418,851 - $628,300||$209,401 - $523,600|
|37%||$523,601 and up||$314,151 and up||$628,301 and up||$523,601 and up|
How income tax brackets work
With income tax brackets, you pay only the rate listed on the portion of your taxable income that falls within that bracket. Realize that not all your income is taxable. Before you arrive at a number that falls into a bracket, you’ll reduce your income through deductions. Once all the deductions have been taken, you’ll see what tax bracket you fall into.
However, you’re still not paying based entirely on your top tax bracket. For example, if you fall into the 22% tax bracket, you’re not paying 22% on all your income. You’re only paying that 22% on the portion of your taxable income in that bracket. Money you earned below the income threshold for the 22% bracket is assessed in a lower tax bracket. Depending on how much you've earned you could be taxed at a number of different rates. That's because we have what's known as a progressive tax system. Let’s walk through an example.
For 2021, you fall into the 22% tax bracket as a single taxpayer if you earn more than $40,525 and up to $86,375. So let’s say you make $50,000 in taxable income as a single filer in 2021. Your bill would break out as follows:
- 10% of income, up to $9,950: Your taxes owed on this portion would be $995.00. ($9.950 x .10 = $995.00).
- 12% of income, between $9,951 and $40,525: Your taxes owed on this portion would be $3,668.88. ($40,525 - $9,951 = $30,574 x .12 = $3,668.88)
- 22% of income, over $40,525 and up to your $50,000 income: Your taxes owed on this portion would be $2,084.50 ($50,000 - $40,525 = $9,475 x .22 = $2,084.50)
Once you add up what you owe at each level, your total tax bill for 2021 would be $6,748.38. If you’re eligible for any tax credits, those would then be applied to reduce what you actually end up paying.
The alternative minimum tax
The alternative minimum tax (AMT) is levied to ensure that certain taxpayers at least pay a minimum amount of tax, rather than getting out of paying at all. When calculating the AMT, you use a special form from the IRS that will compare your current tax bill with what you’re supposed to pay at minimum. This amount is called the tentative minimum tax. If your minimum tax requirement is above your tax bill, you’re expected to pay the AMT.
There is an exemption, however. For single filers for 2021, the exemption starts at $73,600 and phases out at $523,600. For joint filers, the exemption starts at $114,600 and begins to phase out at $1,047,200.
Understanding capital gains
Capital gains taxes are levied when you sell an asset, such as an investment, for more than you bought it for. There are long-term capital gains and short-term capital gains. Long-term gains are figured on assets you’ve held for more than a year and taxed at a favorable rate. Short-term gains are levied on assets you’ve held for less than a year and they are taxed at your regular marginal tax rate.
Here are the long-term capital gains rates for 2020, based on your taxable income and filing status:
|Single Filers||Joint Filers||Heads of Households|
|0%||$0 - $40,400||$0 - $80,800||$0 - $54,100|
|15%||$40,401 - $445,850||$80,801 - $501,600||$54,101 - $473,750|
|20%||$445,851 or more||$501,601 or more||$473,751 or more|
How to reduce your taxable income
If you know your filing status and annual wage, you might think you know your tax bracket. But take note: your total wages and other income for 2021 is not the same as your taxable income. In fact, you’re unlikely to be taxed on the full amount you earned in 2021.
Instead, you’ll pay taxes based on your adjusted gross income (AGI), or what you earned less tax deductions, credits, and adjustments. You owe federal income taxes on this adjusted income only, not your gross income.
As a taxpayer, part of preparing your tax return will be calculating your adjusted gross income. And properly adjusting and reducing your taxable income is one of the main ways that you can lower your tax bill.
A common adjustment is the standard deduction — here’s a look at the new standard deduction amounts for 2021:
- $12,550 for single filers or married people filing separately
- $18,800 for heads of household
- $25,100 for married couples filing jointly
You might also opt to itemize tax deductions, which can be a way for some filers to claim adjustments beyond the standard deduction.
Additionally, you can claim some tax deductions and credits whether you’re taking a standard deduction or itemizing. The following are some common deductions and credits:
- Educator expense deduction: Teachers may deduct up to $250 for expenses related to their job, such as the purchase of classroom supplies.
- Tax-advantaged accounts: Contributions to tax-advantaged accounts such as health savings accounts or individual retirement accounts can reduce your adjusted gross income.
- Student loan interest deduction: You can reduce AGI by the amount of qualifying interest you paid in 2021, up to $2,500.
- Self-employment costs: If you work for your own business,certain costs of this arrangement including health insurance and half of your self-employment taxes can be deductible.
- Educational tax credits: You can write off qualifying school or college tuition and other educational expenses through educational tax credits or deductions, such as the American opportunity tax credit.
- Child tax credit: If you have a qualifying child under the age of 17, you might be eligible for up to $3,000 as a tax credit for your child. Phase-outs on the child tax credit begin at $200,000 for single filers and $400,000 for joint filers.
- Earned income tax credit: For those who are eligible, this tax credit can offer up to $6,728 in 2021 for working families with three children. There are income eligibility requirements, as this tax credit is designed to benefit low- and moderate-income earners.
Why do tax brackets change every year?
The IRS adjusts tax brackets based on a measure of inflation in the U.S. economy. Because the cost-of-living increases, tax brackets change, along with the amount of the standard deduction and other adjustments.
The tax reforms of the Tax Cuts and Jobs Act of 2017 changed the measure used by the IRS from reflecting urban consumers to reflecting the so-called chained consumer price index, which results in smaller upward changes to deductions and tax brackets.
What is the highest tax bracket in the U.S.?
As of 2022, the highest individual tax bracket in the U.S. is 37%.
How can I reduce my effective tax rate?
Your effective tax rate is the actual rate you pay after going through all the tax brackets and after accounting for deductions and credits. Your effective tax rate is usually lower than what is reflected by your tax bracket.
You can reduce your effective tax rate by claiming deductions to reduce your taxable income, as well as making sure you get all the credits you’re eligible for. This will end up reducing your total tax bill and, as a result, your effective tax rate.
Bottom line on the 2022 tax season
Beginning to prepare your personal finances for this tax season will help you avoid needless tax filing mistakes and stress. The earlier you start, the more time you'll have to complete tasks related to filing taxes, whether you use an accountant or shop around for the best tax software. Plus, you’ll be able to file a return earlier and receive your tax refund earlier, which will make it easier to figure out how to manage your money going forward. Or, if you wind up owing taxes, you’ll know how much you must pay in taxes and have time to do so by the filing deadline.
So review your 2021 tax bracket now and get familiar with tax deductions and credits to get ready to file your tax return.