Posted by Fred Lake

The New Income Tax Brackets for 2020 and 2021

The New Income Tax Brackets for 2020 and 2021

In the US tax system, income taxes are progressive, so you pay different types of taxes. Knowing the federal tax brackets for fiscal 2020 and 2021 can help you maximize your tax savings by keeping more of your hard-earned money. The United States has a progressive tax system, which means the higher your taxable income, the higher the tax rate. Income tax rates increase in stages called tax brackets. Seven brackets apply to ordinary taxpayers' income: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Each year, the IRS adjusts inflation to increase tax rates. With each year, you can earn a little more before paying taxes at a higher rate.

Finding the tax support that applies to you depends on two things. It would help if you first established your marital status for registration purposes: individual, married filing separately, head of household and married filing jointly. Secondly, it depends on your taxable income.

Tax brackets for income earned in 2020

  • 10% for income up to $ 9,875 ($ 19,750 for couples filing jointly)

  • 12% for an income over $ 9,875 ($ 19,750 for couples filing jointly)

  • 22% for earnings over $ 40,125 ($ 80,250 for couples filing jointly)

  • 24% for income over $ 85,525 ($ 171,050 for couples filing jointly)

  • 32% for income over $ 163,300 ($ 326,600 for couples filing jointly)

  • 35%, for an income exceeding $ 207,350 ($ 414,700 for couples filing jointly)

  • 37% for income over $ 518,400 ($ 622,050 for couples filing jointly)

Tax brackets for income accrued in 2021

  • 10% for income up to $ 9,950 ($ 19,900 for couples filing jointly)

  • 12% for income over $ 9,950 ($ 19,900 for couples filing jointly)

  • 22% for income over $ 40,525 ($ 81,050 for couples filing jointly)

  • 24% for income over $ 86,375 ($ 172,750 for couples filing jointly)

  • 32% for income over $ 164,925 ($ 329,850 for couples filing jointly)

  • 35% for income over $ 209,425 ($ 418,850 for couples filing jointly)

  • 37% for income over $ 523,600 ($ 628,300 for couples filing jointly)

Understand how tax brackets work

With a progressive tax system such as ours, it means we have different tax rates. It is important to understand that tax brackets apply "up to" a certain level.

Each time you increase an income level, you pay a higher rate for the part of your income that is above that level but only for that part. For most people, a portion of their income will be subject to several different rates. Therefore, different parts or parts of your taxable income will be taxed at different percentage rates.

Example of the income bracket

For instance, if you are a single taxpayer with a taxable income of $ 95,000, you will be in the 24% group. However, if you multiply 0.24 by all of your taxable income, you are paying a lot.

Instead, you are taxed at a different rate in different brackets:

  • Part of your income will be subject to a lower rate of 10%.

  • Some will be subject to 12%.

  • Another portion of it will be subject to 22%.

  • The rest will be subject to a 24% fee.

In our example, the taxpayer owes $ 16,821 of federal taxable income out of $ 95,000 in the fiscal year 2021. This equates to an effective rate of 17.7%.

Our example does not include state income tax; that would be a separate calculation. Each state's tax system is different, and state tax brackets differ from federal tax brackets. Additionally, some states have a flat rate, which means all taxable income is taxed at the same rate - there are no brackets.

Also, note that the example above does not include Social Security, Medicare, or other taxes or withholding taxes.

Marginal rate vs. effective tax rate

The marginal tax rate indicates the rate at which a portion, even a dollar, of income is taxed.

When someone asks you, "what's your marginal rate?" It usually refers to the highest level of federal income tax you are in. Suppose your max level is 24%, like in our previous example. Your marginal tax rate would be 24%. 

Customarily, most people pay an average tax rate lower than the highest tax level because they take all the lower rates into account and combine them. This average rate that you pay is also called the "effective tax rate." This means that you don't owe 24%; rather, you could pay 17.7%, as in our example.

Strategies for falling into a lower tax bracket

Some people are surprised to find that they are in a high tax category and want to know how to reduce it.

One way to reduce tax brackets is to reduce taxable income. You could make larger contributions to retirement accounts to reduce your taxable income and, therefore, your taxes. With different accounts, such as IRAs, you can contribute until tax day, and it will count.

Another strategy for reducing tax rates is to accumulate multiple deductions. The tax exemption applies to taxable income and not to gross profit. Deductions reduce your taxable income, and this can reduce and even lower tax owed.

However, if you are close to several tax cuts, your tax savings may be slightly lower.

Other changes for 2021

If you take the standard deduction, the IRS has increased it for 2021 levels by an additional $150 for individuals, heads of households, and couples filing separately, and $300 for couples filing jointly. This deduction amount reduces the taxable income of taxpayers and may place them in a lower tax bracket. 

Finally, for 2020 and 2021, the personal exemption is $0 and no longer applies after the approval of the TCJA.



Fred Lake
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