The IRS just released the new Income Tax Brackets and Standard Deductions for 2021.
Why? Each year the IRS adjusts more than 60 provisions to account for inflation… and tax ranges just so happens to be one of them.
This means, right now is a good time to start tax planning for 2021 even though we are still in 2020.
So we’ll be going over what has changed, what hasn’t changed, and how the election plays a part in what the IRS just announced so make sure you read until the end.
Let’s dive right in.
If we compare the 2020 and 2021 tax brackets and rates we will notice a couple of things:
First of all, the actual rates have not changed.
In fact, rates have not changed since 2018, and we see that they are still: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Ok, what about the tax bracket income ranges?
Tax Bracket Income Ranges
10 percent rate
The lowest rate of 10% applies to those filing single and make $9,950 or less, or those filing married and earn under $19,900. This is a jump of $75 for those filing single and $150 for those married filing jointly when compared to the 2020 tax bracket.
12 percent rate
Make more than that? Every dollar up to $40,525 if you’re filing single and $81,050 if you are filing married is slapped with a tax of 12 percent. This is a jump of $400 at the end of the bracket for those filing single and $800 for those married filing jointly when compared to the 2020 tax bracket.
22 percent rate
For every dollar after that, the rate is 22% for those filing single who make up to $86,375 and those who are married who make $172,750. This is a jump of $850 at the end of the bracket for those filing single and $1700 for those married filing jointly when compared to the 2020 tax bracket.
24 percent rate
If you spill into the next bracket, those dollars will be taxed at 24% for those filing single who make up to $164,925 and those married whose income exceed $329,850. This is a jump of $1625 at the end of the bracket for those filing single and $3250 for those married filing jointly when compared to the 2020 tax bracket.
32 percent rate
Every dollar after that, uncle Sam tags in the undertaker and taxes you at a 32% rate for the single filers who have income up to $209,425 or up to $418,850 if married filing jointly. This is a jump of $2075 at the end of the bracket for those filing single and $4150 for those married filing jointly when compared to the 2020 tax bracket.
35 percent rate
A 35% rate applies to taxpayers who earn up to $523,600 and are single or who are couples who earn up to $628,000. This is a jump of $5200 at the end of the bracket for those filing single and $10,400 for those married filing jointly when compared to the 2020 tax bracket.
37 percent rate
Lastly, at the highest of highs, any dollar that does not fall into the previous tax bracket plunges into the 37% tax rate when compared to the 2020 tax bracket.
So what does it all mean?
Well in short, it means that compared to 2020, next year’s tax rates jumped about 1%.
Now something we need to remember is that the tax brackets are marginal, which means that each range of income is taxed at it’s specific bracket.
Here’s a good example of how that looks:
Notice how each specific range of income is taxed in accordance with the bracket of income it is in.
So for example, if you make 50,000 dollars per year, placing you in the 22% tax bracket, not all $50,000 will be taxed at 22%.
You can take a breather.
Let’s talk about the standard deduction.
What is a Standard Deduction?
When you file your federal income taxes, you choose to claim either the standard deduction or itemized deductions. Why? Deductions reduce your taxable income.
Here’s a fun fact for you… Nearly 90% of people choose the standard deduction. Mostly because:
1) it’s easier to claim and
2) it is enough for most people
Well the IRS also adjusted the Standard deduction for 2021.
It’s now $150 higher for single taxpayers, married couples filing separate returns, and head-of-household filers. You can see the 2021 Standard Deductions here:
|Filing Status||2021 Standard Deduction|
|Single, Married Filing Separately||$12,550|
|Married Filing Jointly||$25,100|
|Head of Household||$18,800|
Ok, there you have it folks! Oh wait, I almost forgot.
So how does the presidential election affect these new IRS tax brackets?
For example, Joe Biden plans to raise the highest personal income rate back up to 39.6% (it was lowered to 37% by the 2017 tax reform law).
Well, the election that happened this November does not change them at all as congress would still have to vote to change the tax rates for them to change.
Basically, they are in effect until they aren’t and there is no guarantee they will or won’t change.
If you’re worrying about your business taxes or want to start having a clear tax plan next year, 2021, then look no further. LYFE Accounting’s tax experts and consultants would love to help you out. Contact us today to get started!