Introduction
Federal tax brackets are a critical component of the United States tax system. The Internal Revenue Service (IRS) uses these brackets to levy income taxes on individuals and businesses. Taxpayers are assigned a tax bracket based on their income, and each bracket is associated with a specific tax rate. This article focuses on what taxpayers need to know about federal tax brackets.
What are Federal Tax Brackets?
Federal tax brackets refer to the range of income levels and the corresponding tax rate each range is assigned. The tax rate increases as income increases. The tax bracket system is progressive, meaning that taxpayers with higher incomes will pay a higher percentage of their income in taxes than those with lower incomes.
The federal tax brackets are updated annually to reflect inflation adjusted for the cost of living index. These annual updates are designed to ensure that taxpayers are not inadvertently pushed into higher tax brackets as a result of income growth, which relates primarily to inflation.
How do Federal Tax Brackets Work?
The IRS divides taxpayers into six different tax brackets based on adjusted gross income and filing status. The tax brackets are progressive, with each subsequent rate applying to income within the corresponding bracket.
For example, in 2021, income earners in the 22% tax bracket will pay $0.22 for every dollar earned above the 12% tax bracket’s threshold. Therefore, for single taxpayers, those earning between $40,126-$85,525 have an income within the 22% tax bracket, and every dollar earned above $40,125 is taxed at the higher rate.
Federal Tax Brackets for 2021
There are six tax brackets in the United States, and they are as follows:
– 10% on taxable income up to $9,950
– 12% on taxable income over $9,950 up to $40,225
– 22% on taxable income over $40,225 up to $85,525
– 24% on taxable income over $85,525 up to $163,300
– 32% on taxable income over $163,300 up to $207,350
– 35% on taxable income over $207,350 up to $518,400
– 37% on taxable income over $518,400
The income thresholds are dependent on the taxpayer’s tax-filing status. For example, the income thresholds are higher for couples filing jointly than for individuals. The tax brackets are regularly reviewed and adjusted annually to ensure they keep pace with inflation.
Tax Deductions and Credits
Tax deductions and credits can help taxpayers remain within a lower tax bracket or reduce their taxable income. Tax deductions often take the form of expenses that a taxpayer incurred and are allowed under tax laws such as charitable contributions, student loan interest, and more.
Tax credits, on the other hand, are applied against the taxes, making them more beneficial than deductions. Therefore, tax credits such as the Child Tax Credit or the Earned Income Tax Credit can decrease the tax owed significantly.
Conclusion
Understanding federal tax brackets is essential for all taxpayers, as it allows them to determine the amount of taxes they owe. The tax bracket system used by the United States is progressive, meaning the higher the taxable income, the higher the tax rate. It is imperative to be aware of the tax deductions and credits that are available to help reduce the amount of taxes paid as well. Taxpayers can consult online tax calculators or tax professionals for help in determining their tax bracket and minimizing their tax liability.
The United States tax system is a progressive model, meaning the tax rates fluctuate based on income earned. As income increases the tax rate attached proportionately rises. The federal tax brackets are aligned based on income. In addition the federal tax brackets are a percentage of the individuals income, therefore, the percentages yield a similar net income taxation model.
The theory behind the progressive system is that those who earn multiple times more than the lowest bracket have an obligation to contribute more towards funding for current expenditures and public services such as the military, the infrastructure, etc.
Federal taxes fund nearly every aspect of the United States government. Transportation, the education system, law enforcement agencies, and the military are all examples of public services funded by the federal tax brackets. The percentage of income levied varies by the individual’s amount earned. As of 2009, the federal tax brackets range from 10 percent to 35 percent.
These numbers simply mean that individuals who earn under $8,350 for individuals and $16,700 for married couples will pay 10% of their respective income. This 10% is obviously lower than the other federal tax brackets, however, in relative terms the low income individual is paying a similar amount.
As of 2009, the highest federal tax brackets were 28% (for individuals who earned between $171,551 to $372,950) and 35% (for individuals who earn more than $372,950).
