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What is My Tax Bracket for 2021? Thumbnail

What is My Tax Bracket for 2021?

The IRS recently released the new tax brackets for the 2021 tax year so now you can start thinking about how to handle your 2021 finances in a tax-efficient way. The seven 2021 tax rates themselves didn't change (they are the same as those in effect for the 2020 calendar year), however the tax bracket ranges were modified based on inflation. You could be in a different tax bracket for 2021 than the last time you reported your taxes, even if your income has not changed.

Tax Brackets Are Marginal

Being "in" a certain tax bracket doesn't mean you pay that federal income tax rate on everything you make. The progressive tax system means that people with higher taxable incomes are subject to higher federal income tax rates and people with lower taxable incomes are subject to lower federal income tax rates.

The IRS divides income into different tax rates. Each subsequent portion of your income will have an increased tax rate. For example, if you make $40,526 in 2021, your first $9,950 will be taxed at 10 percent. The next portion of your income, from $9,951 to $40,525, will be taxed at an increased rate of 12 percent. The next portion of your income, from $40,526 to $86,375, will be taxed at 22% and so on.

Again, if you're in the 24% tax bracket it does not mean that you pay 24% income tax across the board. As your income increases you’ll fall into higher tax brackets and will have a higher tax rate for each portion of your increased income. 

Why Would My Tax Bracket Be Different? 

The IRS regularly adjusts tax brackets to take inflation into consideration. This is because with inflation people will face higher prices. That means the purchasing power of their dollar is decreased. Knowing this, the IRS adjusts brackets in order to avoid bracket creep, a circumstance that occurs when inflation pushes your income into a higher tax bracket or credits and deductions are reduced. In this scenario an individual may not actually have increased purchasing power or greater disposable income, even with an increase in wages and salaries.

2021 Tax Brackets 

Without further ado, here are the 2021 tax brackets according to your filing status and income from the IRS:

10% Tax Rate

  • Single Individuals: from $0 to $9,950
  • Married Individuals Filing Jointly: from $0 to $19,900
  • Heads of Households: from $0-$14,200
  • Married Individuals Filing Separately: from $0-$9,950

12% Tax Rate

  • Single Individuals: from $9,950-$40,525
  • Married Individuals Filing Jointly: from $19,900-$81,050
  • Heads of Households: from $14,200-$54,200
  • Married Individuals Filing Separately: from $9,950-$40,525

22% Tax Rate

  • Single Individuals: from $40,525-$86,375  
  • Married Individuals Filing Jointly: from $81,050-$172,750       
  • Heads of Households: from $54,200-$86,350
  • Married Individuals Filing Separately: from $40,525-$86,375

24% Tax Rate

  • Single Individuals: from $86,375-$164,925   
  • Married Individuals Filing Jointly: from $172,750-$329,850   
  • Heads of Households: from $86,350-$164,900
  • Married Individuals Filing Separately: from $86,375-$164,925

32% Tax Rate

  • Single Individuals: from $164,925-$209,425   
  • Married Individuals Filing Jointly: from $329,850-$418,850     
  • Heads of Households: $164,900-$209,400
  • Married Individuals Filing Separately: from $164,925-$209,425

35% Tax Rate

  • Single Individuals: $209,425-$523,600
  • Married Individuals Filing Jointly: from $418,850-$628,300
  • Heads of Households: from $209,400-$523,600
  • Married Individuals Filing Separately: from $209,425-$314,150

37% Tax Rate

  • Single Individuals: Greater than $523,600     
  • Married Individuals Filing Jointly: Greater than $628,301
  • Heads of Households: Greater than $523,600
  • Married Individuals Filing Separately: Greater than $314,150

In addition to the tax inflation adjustments, the IRS also altered standard deductions. While the above rates and brackets are at the federal level, different states might have varying brackets and rates. The table below shows the standard deduction amounts for 2021:

Filing Status

2020 Standard Deduction

2021 Standard Deduction

Married filing jointly

$24,800

$25,100

Head of household

$18,650

$18,800

Single/ married filing separately

$12,400

$12,550

 

No one wants to pay more taxes than they have to or need to. We want to pay Aunt IRS what we owe but we don't want to leave a tip. Your retirement distribution strategy should consider your income tax situation.

You Need A Plan

A goal of retiring - without a plan to get there - is simply a plan to outlive your money. Retirement isn't some magical age. It's a dollar amount. If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and possibly leave a legacy to your family. The consultation is free and without obligation. Contact us to set up a consultation.

For more articles about retirement planning and investing click here. Also for a great read on the 80/20 Principle check out this book.

Thanks for reading!

Brian Coleman/Retirement Planner/Investment Manager

80/20 Financial Services is an independent Registered Investment Advisory Firm. Our focus is working with retirees, and we specialize in working with retirees who are approaching or going through the retirement transition. We are located in Ozark, MO but we have the ability to work with clients throughout the United States. Contact us today for help with your retirement needs.


Photo by The New York Public Library on Unsplash