Each year, the IRS updates its individual income tax brackets to reflect inflation. Although we still have two months left in 2020, the IRS has already released next year’s marginal income tax rates and ranges.
The tax rates didn’t change, but the tax bracket income ranges for the 2021 tax year are adjusted to account for inflation. These rates are in effect for 2021 and will affect the tax return you file in 2022.
For married individuals filing jointly:
10%: Taxable income up to $19,900
12%: Taxable income between $19,900 to $81,050
22%: Taxable income between $81,050 to $172,750
24%: Taxable income between $172,750 to $329,850
32%: Taxable income between $329,850 to $418,850
35%: Taxable income between $418,850 to $628,300
37%: Taxable income over $628,300
For individual single taxpayers:
10%: Taxable income up to $9,950
12%: Taxable income between $9,950 to $40,525
22%: Taxable income between $40,525 to $86,375
24%: Taxable income between $86,375 to $164,925
32% Taxable income between $164,925 to $209,425
35%: Taxable income between $209,425 to $523,600
37%: Taxable income over $523,600
The tax brackets are marginal, which means that different portions of your income – up to a specified dollar amount – will be taxed at a different rate. Not all income is taxed at your highest bracket.
These are the rates and income brackets for federal taxes. Depending on your state, state income taxes might apply as well. Our readers in Tennessee know that Tennessee has no state income tax, other than the Hall Tax that will phase-out to nothing for 2021 and beyond.
The above rates apply to taxable income, after the standard deduction (or itemized deductions) and other tax breaks have been taken. The IRS also announced that the standard deduction for tax year 2021 will increase by $300 to $25,100 for married couples filing jointly, and by $150 to $12,550 for single individuals and married individuals filing separately. For heads of households, the standard deduction will increase by $150 to $18,800.
For more information, please see this link. We encourage you to speak with your CPA or tax advisor with questions about how these updates, although modest, might affect you.
Meanwhile, we will continue to keep our eye on possible future changes to the tax code. Depending on lawmakers’ attitudes and actions in the upcoming years, some changes to tax policy could be much more significant than routine annual inflation adjustments such as these.