Tax brackets are divisions in income at which your income tax rate changes. Once your income rises above one of these divisions, that income is taxed at a higher rate than the income below it. The federal government has seven tax brackets and states have up to 12 brackets for income taxes.
What Are the U.S. Federal Tax Brackets for 2021?
Your bracket is determined by how much taxable income you receive each year and your filing status. There are four filing statuses and seven graduated tax rates for 2021 taxes due on April 18, 2022.
- You can file as single if you are not married or are divorced as long as you are not claimed as a dependent on someone else’s tax return.
- Head of household
- You can file as head of household if you are unmarried, divorced, have a qualifying child or dependent and paid more than half the costs of running the household where the child or dependent lived for at least half of the year.
- Married filing jointly
- Couples married by December 31 have the option to file a joint tax return for that year.
- Married filing separately
- Couples married by December 31 have the option to file separate tax returns for that year.
Each of these filing statuses has its own tax brackets. The brackets are beginning and end points at which your income is taxed at a specific rate. Understanding how tax brackets work – and which bracket your income falls into – can be helpful in your overall personal finance strategy.
|TAX RATE||SINGLE FILERS TAX BRACKETS||HEAD OF HOUSEHOLD TAX BRACKETS||MARRIED FILING JOINTLY OR QUALIFYING WIDOW TAX BRACKETS||MARRIED FILING SEPARATELY TAX BRACKETS|
|10%||$0 to $9,950||$0 to $14,200||$0 to $19,900||$0 to $9,950|
|12%||$9,951 to $40,525||$14,201 to $54,200||$19,901 to $81,050||$9,951 to $40,525|
|22%||$40,526 to $86,375||$54,201 to $86,350||$81,051 to $172,750||$40,526 to $86,375|
|24%||$86,376 to $164,925||$86,351 to $164,900||$172,751 to $329,850||$86,376 to $164,925|
|32%||$164,926 to $209,425||$164,901 to $209,400||$329,851 to $418,850||$164,926 to $209,425|
|35%||$209,426 to $523,600||$209,401 to $523,600||$418,851 to $628,300||$209,426 to $314,150|
|37%||More than $523,600||More than $523,600||More than $628,300||More than $314,150|
Marginal Tax Rate
The terms tax rate and tax bracket are often used interchangeably, but they are different things.
The marginal tax rate is the tax rate you pay on an additional dollar of income. The federal income tax’s progressive nature causes the marginal tax rate to increase as your taxable income increases. These different percentage amounts – or tax rates – are broken into seven tax brackets.
A tax bracket is a certain block of your income. Each tax bracket has a different tax rate. Unless your income is in the lowest bracket, your income will fall into multiple tax brackets.
How Do Tax Brackets Work?
The federal income tax is a progressive system. People who make higher incomes are taxed at progressively higher rates.
The federal government divides your income into blocks of money. Each block is a tax bracket. Each bracket of income is taxed at a progressively higher rate.
Not all of your income is taxed at the highest rate for your income. Each block of income is taxed at the rate for that particular bracket.
Take a look at the 2021 tax brackets if you filed single with $60,000 in taxable income.
|TAX RATE||TAX BRACKET|
|10%||$0 to $9,950|
|12%||$9,951 to $40,525|
|22%||$40,526 to $86,375|
How To Reduce Your Tax Bill
There are steps you can take to legally reduce your tax bill by getting into a lower tax bracket. These generally work best if you are on the edge of a higher tax bracket where slightly lowering your income could keep you from crossing that line.
- Tax deductions
- Tax deductions such as charitable contributions can lower your taxable income, reducing your tax bill and possibly keeping you in a lower tax bracket.
- Earned income tax credit (EITC)
- The EITC helps low to moderate income taxpayers with a tax break. People who qualify can use the credit to reduce their tax liability and this may move them to a lower tax bracket.
- Child tax credit
- You can claim the child tax credit for each dependent child. This reduces your tax liability on a dollar-for-dollar basis and may add up to enough to move your taxable income to a lower tax bracket.
- Other strategies
- If you delay income until after the first of the year, this may keep that income from being taxed at a higher rate this year. You can also make last-minute contributions to tax-deferred or tax-exempt accounts such as a health savings account, 401(k) or individual retirement account (IRA) to lower your taxable income.
You may be able to use multiple strategies, credits and deductions to significantly reduce your tax liability, keeping your taxable income within a lower tax bracket. Tax preparation software and professionals may also help you find additional tax breaks that can help reduce your tax bill.
State Tax Brackets
Individual income taxes accounted for 38 percent of all state tax collections in 2018, according to the nonprofit Tax Foundation. But state income tax brackets – and state income tax laws – vary from state to state.
- 42 states collect individual income taxes.
- 41 states tax only wage and salary income.
- 1 state (New Hampshire) only taxes dividend and interest income.
The eight states that collect no state income taxes obviously have no state tax brackets.
- South Dakota
The tax rate differs among the nine states that collect a flat rate on income from salaries and wages. New Hampshire also has a flat rate for all interest and dividend income – the only income taxed by that state.
- New Hampshire
- North Carolina
Of the 32 states and the District of Columbia that have graduated-rate income taxes, the number of tax brackets vary widely. Hawaii has 12 brackets, the most of any state.
The Federation of Tax Administrators provides links to the state tax agencies for all 50 states plus Puerto Rico and the District of Columbia. You can contact your state tax agency to find more information about your state’s income tax brackets and income tax rates.
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- Chang, E. and Washington, K. (2021, May 14). What Is My Tax Bracket? 2020-2021 Federal Tax Brackets. Retrieved from https://www.forbes.com/advisor/taxes/taxes-federal-income-tax-bracket/
- Congressional Research Service. (2020, November 9). The Federal Income Tax: How Do Marginal Income Tax Rates Work in 2020? Retrieved from https://crsreports.congress.gov/product/pdf/IN/IN11530
- Federation of Tax Administrators. (n.d.). State Tax Agencies. Retrieved from https://www.taxadmin.org/state-tax-agencies
- Loughead, K. (2021, February 17). State Individual Income Tax Rates and Brackets for 2021. Retrieved from https://taxfoundation.org/publications/state-individual-income-tax-rates-and-brackets/
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