You will have different viewpoints and understandings on the impact of tax has on you with your earnings. May be different personal had already spoken to you and made some uncertainties in your mind. There is nothing to worry about this as IRD has cleared laid down the Tax brackets and it is quite easy to understand. When you look at the 2021 tax brackets, certain changes have done in the bracket upper limits comparison to last financial year.
More on income tax brackets
Income tax brackets are determined mainly on the level of income you are having and taking your civil status into consideration. The 2021 tax brackets are segmented into six different segments based on the income you make. Also there are four separate filing categories namely single, married filing separately, married filing jointly, and head of household. Your earnings decides where you will fall in tax brackets and your marital status will depend on your filing status.
When you analyze it, the top marginal income tax rate of 37 percent will applicable for taxpayers exceeding and income of $523,600 and higher for unmarried individual filers and $628,300 and higher for married couples filing jointly.
2021 Federal Income Tax Brackets for Single Filers, Married Couples Filing Jointly and Heads of Households
| Rate | For Unmarried Individuals | For Married Individuals Filing Joint Returns | For Heads of Households |
| 10% | Up to $9,950 | Up to $19,900 | Up to $14,200 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 | $14,201 to $54,200 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 | $54,201 to $86,350 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 | $86,351 to $164,900 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 | $164,901 to $209,400 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 | $209,401 to $523,600 |
| 37% | Over $523,600 | Over $628,300 | Over $523,600 |
| Source: Internal Revenue Service | |||
Understanding more on how federal income tax brackets work
Although the calculations seems very straightforward, one could very easily miscalculate the final tax liability against income. Also commonly you would have heard some would say not to earn so much of money as you will end up paying a higher price for Tax. This is totally not right as the calculations are done in a constructive manner.
To understand better, let’s take an example. There are two examples explained and this will clear your thoughts on tax liability calculations. Please note that these two scenarios will disregard any other deduction and outside influencers which would impact individual’s tax situation.
In example one, let’s assume you are an individual who makes $ 9,950 as the annual income. According to latest published 2021 tax brackets, you will be liable to pay a 10% of tax. Let’s say you needed up earning $ 9,960 income and what will be your tax liability? The below graph will explain this in detailed.
As some would incorrectly interpret, for a total income of $ 9,960, you will not ended up paying 12% tax. So you will get charged 10% until $ 9,950 as this scenario is for a single unmarried individual and 12% will be charged for the additional $ 10 the individual makes which comes only $ 1.2 for the second bracket. So you ended up paying a total tax amount of $ 996.2 in contrary to $ 1195.2 if calculated 12% as the tax rate.
This calculations is applicable for all the tax brackets. To demonstrate this further, let’s take an example of if you file jointly with your spouse and both make a total of $ 85,100 annually. According to the 2021 tax brackets, you would be in the 22% bracket. But as we explained, it is not the case.
So the calculations are as follows;
Up to $19,900 at the rate of 10% of tax liability = $ 1,990
From $19,901 to $81,050 at the rate of 12% of tax liability = $ 7,338
Balance $ 50 at the rate of 22% of tax liability = $ 11
Total tax payable for $ 85,100 is = $ 9,339
Hence the total would be $ 9,339 for a total joint income of $ 85,100 annually. It is not 22% of $ 85,100 which comes to $18,722. In fact it is only 10.97% of tax calculated against the total income. So in this example, the marginal tax rate is 22% and the effective tax rate is 10.97%.
Bottom Line
Remember your top tax bracket doesn’t merely depend on your salary. There are other factors which contributes to the final tax liability figures such as interest and capital gains and your deductions. This could be gaining for you as you could fall into a lower tax bracket, reducing your tax liability.
Further when filing jointly and if your spouse has tax refunds due to scenarios such as unpaid government debt on federal government, sometimes it would be advantageous to select to file as “Married Filing Separately”
Will the President Joe Biden’s Tax plans will dramatically?
There will be few changes will introduced under President Joe Biden’s regime.
According to Investopedia, there will be increase in federal taxes imposed on corporations and wealthy and higher income taxpayers and however, lower-income individuals’ rates generally would not change and families, in particular, would be entitled to expanded credits and deductions.
In summary
In order to totally understand clearly how the income tax brackets work will immensely support you to better prepare yourself and plan your financials effectively and accurately while reducing your tax burden or tax refund. From year 2020 to 2021, there is a change in limits in each tax bracket covering four main filing categories.
Also please keep in mind that US Tax code is extremely complex and takes a fairly a long time to understand the depth. There are readily available Tax generation software which you can use to get your calculations done which will help you in your day to day busy lives. Or else you can get the help from professional reputed Tax consultants to suggest and guide you with the most appropriate filing mechanisms.
