What are the IRS Tax Brackets?

The term “”tax bracket”” gets thrown around a lot during tax season, but what does it actually mean? Simply put, tax brackets are a system created by the Internal Revenue Service (IRS) that divides taxpayers into different income ranges, each with its tax rate. In other words, the tax bracket you fall into determines how much of your income you’ll be paying in federal taxes.

If you’re like many Americans, you probably have a vague understanding of how the tax bracket system works – the more you earn, the higher your tax rate, right? Well, it’s a bit more complicated than that. In this article, we’ll break down everything you need to know about the IRS tax brackets, how they work, and what they mean for your income taxes.

What are the 2021 IRS Tax Brackets?

The tax brackets for the 2021 tax year were released by the IRS on November 5, 2020. Let’s take a closer look at how they break down:

– For single filers:

– 10% on taxable income up to $9,950
– 12% on taxable income between $9,951 and $40,525
– 22% on taxable income between $40,526 and $86,375
– 24% on taxable income between $86,376 and $164,925
– 32% on taxable income between $164,926 and $209,425
– 35% on taxable income between $209,426 and $523,600
– 37% on taxable income over $523,600

– For married couples filing jointly:

– 10% on taxable income up to $19,900
– 12% on taxable income between $19,901 and $81,050
– 22% on taxable income between $81,051 and $172,750
– 24% on taxable income between $172,751 and $329,850
– 32% on taxable income between $329,851 and $418,850
– 35% on taxable income between $418,851 and $628,300
– 37% on taxable income over $628,300

– For heads of household:

– 10% on taxable income up to $14,200
– 12% on taxable income between $14,201 and $54,200
– 22% on taxable income between $54,201 and $86,350
– 24% on taxable income between $86,351 and $164,900
– 32% on taxable income between $164,901 and $209,400
– 35% on taxable income between $209,401 and $523,600
– 37% on taxable income over $523,600

– For married couples filing separately:

– 10% on taxable income up to $9,950
– 12% on taxable income between $9,951 and $40,525
– 22% on taxable income between $40,526 and $86,375
– 24% on taxable income between $86,376 and $164,925
– 32% on taxable income between $164,926 and $209,425
– 35% on taxable income between $209,426 and $314,150
– 37% on taxable income over $314,150

But what does all of this actually mean for you and your taxes? Let’s break it down further.

How Do Tax Brackets Work?

As we’ve already mentioned, tax brackets are based on your taxable income, which is your total income minus any deductions and exemptions. So, let’s say you’re a single filer with a taxable income of $50,000 in 2021. That means you fall into the 22% tax bracket.

Now, here’s where things get interesting: the tax bracket system is progressive. That means that you only pay the higher tax rates on the portion of your income that falls into that bracket. So, using our previous example, you would pay:

– 10% on the first $9,950 of your taxable income ($995)
– 12% on the portion of your taxable income between $9,951 and $40,525 ($3,669)
– 22% on the portion of your taxable income between $40,526 and $50,000 ($2,200)

This all adds up to a total tax bill of $6,864, which is an effective tax rate of 13.73%.

It’s also worth noting that the tax brackets themselves are adjusted every year for inflation. For example, the 2021 tax brackets saw an average increase of about 1% from the previous year.

Common Misconceptions About Tax Brackets

There are a lot of myths and misunderstandings out there when it comes to tax brackets. Let’s clear up some common misconceptions:

– “”If I move up to a higher tax bracket, I’ll end up making less money overall””: This is a classic example of a misunderstanding of how the progressive tax system works. As we just explained, you only pay the higher tax rate on the portion of your income that falls into the higher bracket. So, in reality, making more money and moving up a tax bracket will almost always result in a net gain.
– “”I don’t want to get a raise because it will push me into a higher tax bracket””: Again, this is a common misconception. Yes, your taxes will go up if you make more money, but only by the amount of your increased earnings that falls into the higher bracket. The rest of your income will be taxed at the same or lower rate.
– “”I’m in the top tax bracket, so I’m paying 37% of my income in taxes””: While it’s technically true that the top tax bracket is currently 37%, it’s not accurate to say that someone in that bracket is paying 37% of their income in taxes. Remember, the tax bracket system is progressive, so a person in the top bracket is only paying that rate on the portion of their income that falls into that bracket. In fact, the effective tax rate for someone in the top bracket is typically much lower than 37%.

Other Factors that Affect Your Tax Liability

While tax brackets are certainly an important factor when it comes to calculating your federal income taxes, they’re not the only thing to consider. There are a number of other factors that can impact your tax liability, including:

– Deductions: Deductions are expenses that reduce your taxable income. The most common deductions are the standard deduction (which is a flat dollar amount that everyone gets) and itemized deductions (which are specific expenses, such as mortgage interest or charitable donations).
– Credits: Unlike deductions, which reduce your taxable income, credits are dollar-for-dollar reductions in your tax liability. For example, the Child Tax Credit allows eligible taxpayers to take a credit of up to $2,000 per child.
– Withholding: If you’re an employee, your employer withholds a certain amount of your income for federal taxes throughout the year. If you have too little withheld, you’ll owe more when tax season comes around. If you have too much withheld, you’ll get a refund.
– Capital gains: If you sell an asset (such as a stock or a piece of real estate) for more than you paid for it, you’ll owe taxes on the profit. This is known as a capital gain.

When it comes to preparing your taxes, it’s important to take all of these factors into consideration in order to accurately determine your tax liability.

Conclusion

Understanding the IRS tax brackets is an important part of managing your finances. While it might seem complicated at first glance, the system is actually fairly straightforward once you break it down. Remember, tax brackets are based on your taxable income, and the system is progressive – you only pay higher rates on the portion of your income that falls into the higher bracket.

Of course, there are other factors to consider when it comes to calculating your taxes, such as deductions, credits, and withholding. But by understanding the basics of tax brackets, you’ll be well on your way to a better understanding of your overall tax liability.