Tax planning is all about thinking ahead. And since the federal income tax brackets for the 2021 tax year are now available, you can start thinking about how to handle your 2021 finances in a tax-efficient way — even though it's still 2020.
The tax rates haven't changed since 2018. For 2021, they're still set at 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the tax brackets are adjusted (or "indexed") each year to account for inflation. The inflation-adjusted tax brackets for 2021 are below.
When using the tax brackets, it's important to remember that the tax rates only apply to the income that falls within the applicable tax bracket range for your filing status. For instance, a married couple filing a joint return with $100,000 of taxable income in 2021 won't pay $22,000 in tax just because their total taxable income falls within the 22% bracket for joint filers. The 22% rate is not applied as a flat rate on the entire $100,000. Instead, using marginal tax rates, the first $19,900 of income is taxed at the 10% rate for a tax of $1,990 on that portion of the income. The next $61,150 of income (the amount from $19,900 to $81,050) is taxed at the 12% rate for an additional tax of $7,338. Then, only the last $18,950 (the amount over $81,050) is taxed at the 22% rate for $4,169 of tax. That comes to a total tax bill of only $13,497. (That's $8,503 less than if a flat 22% rate was applied to the entire $100,000.)
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