Earn Taxes

These Are the New 2021 Tax Brackets and Why They Matter

Dayana Yochim  |  October 28, 2020

The IRS has released some key updates, including 2021 tax bracket adjustments and a new standard deduction.

If the IRS had a fashion week, this would be it. Uncle Sam just rolled out the 2021 tax brackets so we can all see what we’ll be paying in federal income tax rates next year.

Just like previous years, there are seven federal tax brackets for 2021: 10%, 12%, 22%, 24%, 32%, 35% and 37%. States have their own rules on how they tax income, if they tax income at all. 

What will change is the range of income that is taxed at each of the seven rates. For example, in 2020 the income bracket subject to the 22% tax rate for a married couple filing jointly was $80,251 to $171,050. In 2021 the 22% tax bracket has shifted slightly higher to $81,050 to $172,750.

But before we get into the details of the 2021 tax brackets, let’s back up and untangle progressive tax math.

A refresher on how tax brackets work

The “progressive tax system” we have in the U.S. simply means not all of your income is taxed at the same rate. 

The first chunk of income you earn is taxed at the lowest tax rate (10%). The dollars you earn above that — and up to a specific amount — are taxed at the next higher tax rate (12%), and so on it goes until you earn so much that you somehow don’t have to pay taxes at all. (Apologies to gabillionaires for the snark.)

When someone says they are in the 22% tax bracket, it’s a bit of a misnomer. What that really means is that they pay 22% on the portion of their income subject to the highest tax rate — just the dollars that fall within that particular bracket — not every dollar they earn. In tax-speak, this is called the marginal tax rate.

And now, the 2021 tax brackets

Your tax bracket is based on your income and your filing status (single, married filing jointly, married filing separately, head of household). Each year the IRS adjusts tax brackets and other tax provisions to account for inflation. For 2021, the tax brackets are: 

Tax rate If you are single and your income is  If you are married filing jointly and your income is
10% less than $9,950 less than $19,900
12% between $9,950 and $40,525 between $19,900 and $81,050
22% between $40,525 and $86,375 between $81,050 and $172,750
24% between $86,375 and $164,925 between $172,750 and $329,850
32% between $164,925 and $209,425 between $329,850 and $418,850
35% between $209,425 and  $523,600 between $418,850 and $628,300
37% more than $523,600 more than $628,300

Source: IRS.gov

For comparison (and this coming April’s tax prep), here are the 2020 tax brackets:

Tax rate If you are single and your income is  If you are married filing jointly and your income is
10% less than $9,875 less than $19,750
12% between $9,875 and  $40,125 between $19,750 and $80,250
22% between $40,125 and  $85,525 between  $80,250 and $171,050
24% between $85,525 and  $163,300 between $171,050 and $326,600
32% between $163,300 and  $207,350 between $326,600 and $414,700
35% between $207,350 and $518,400 between $414,700 and $622,050
37% more than $518,400 more than $622,050

Source: IRS.gov

2021 tax brackets examples

Let’s start with a married couple filing a joint return with $190,000 in taxable income. They will pay: 

  • 10% federal income tax on the first $19,900 of income (which comes to $1,900 in taxes) 
  • 12% on dollars $19,900 up to $81,050 ($9,328 in taxes)
  • 22% on $81,050 up to $172,750 ($29,502 in taxes)
  • 24% on $172,750 up to $190,00 ($4,140 in taxes)

All told, this couple will pay a total of $42,970 in federal income taxes, which averages out to be 22.61% of their income. In the language of taxes, 22.61% is their effective tax rate.

A single filer earning $60,000 in 2021 will pay:

  • 10% federal income tax on the first $9,950 of income (which comes to $995 in taxes) 
  • 12% on dollars $9,950 up to $40,525 ($4,664 in taxes)
  • 22% on $40,525 up to $60,000 ($4,284 in taxes)

The total federal income tax our single citizen pays is $9,943, which comes to a 16.57% effective tax rate. For cocktail party smalltalk, however, this person can say that they are “in the 22% tax bracket” based on the tax rate they pay on the next dollars they earn. 

What’s the big deal?

The most important part of knowing your tax bracket is to use the knowledge to keep as many dollars in the lower brackets as possible. You do that by reducing your taxable income. The most effective ways to do that are to:

Funnel money into tax-deferred retirement accounts like a traditional IRA, a 401(k) or 403(b). Those dollars won’t count as taxable income in the year you make the contribution. You’ll owe income taxes on the back end when you start taking withdrawals. But hopefully by then you’re in a lower income tax bracket.

Take advantage of flexible spending accounts (FSAs) (including dependent-care FSAs) and health savings accounts (HSAs). The money you save in those will also reduce your taxable income for the year. Plus they have the advantage of being tax-free when you use the funds to pay for qualified expenses.

Take as many tax deductions as you’re allowed. When you take a tax deduction you get to subtract the amount from your taxable income. Most people take the standard deduction, which is an amount that you can automatically deduct from your income taxes without having to itemize. 

The IRS has also increased the standard deduction for 2021: 

  • The standard deduction in 2021 for single taxpayers and those who are married filing separately is $12,550. That is an increase of $150 from 2020.
  • The standard deduction for heads of households is $18,800, up $150 from 2020.
  • The standard deduction for married couples filing jointly is $25,100, an increase of $300 from 2020.

Although there is no limit on itemized deductions, the general rule is that you should take the standard deduction if the itemized account adds up to less than the standard deduction. 

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