Breaking Down Federal Tax Brackets for 2021
Introduction:
Are you confused about the federal tax brackets for 2021? Do you want to know how the tax system works in the USA? If so, then you are in the right place. In this comprehensive guide, we will break down the federal tax brackets for the year 2021.
Federal Tax Brackets:
The federal tax system in the USA is progressive, which means that the rate of tax increases as the income increases. There are seven tax brackets depending on the annual taxable income of an individual or a married couple filing jointly. These tax brackets are:
- 10% for income up to $9,950
- 12% for income between $9,951 to $40,525
- 22% for income between $40,526 to $86,375
- 24% for income between $86,376 to $164,925
- 32% for income between $164,926 to $209,425
- 35% for income between $209,426 to $523,600
- 37% for income over $523,601
It is important to note that these tax brackets are for taxable income, which is the income after all the deductions and exemptions have been taken into account.
Deductions and Exemptions:
Before we dive deeper into the tax brackets, it is important to understand the concept of deductions and exemptions. Deductions are expenses that can be subtracted from the taxable income, thus reducing the amount of tax owed. Exemptions are allowances for dependents such as children, spouse, or elderly parents, which also reduces the taxable income.
For the year 2021, the standard deduction is $12,550 for individuals and $25,100 for married couples filing jointly. This means that if your taxable income is less than these amounts, then you do not have to pay any federal income tax. In addition to this, there are also deductions and exemptions for certain expenses such as mortgage interest, student loan interest, and charitable donations.
The Marginal Tax Rate:
The tax rate on the highest bracket (37%) does not apply to the entire income. This is where the concept of the marginal tax rate comes into play. The marginal tax rate is the rate of tax that applies to the last dollar of income earned within a particular tax bracket.
For example, let's say that your taxable income is $100,000. This means that you fall under the 24% tax bracket. However, this does not mean that you have to pay 24% on all your income. The first $9,950 is taxed at 10%, the income between $9,951 to $40,525 is taxed at 12%, and the income between $40,526 to $86,375 is taxed at 22%. The remaining income of $13,625 is taxed at 24%, giving you a total tax liability of $18,536.25.
Capital Gains Tax:
Capital gains tax is the tax paid on the profits made from selling assets such as stocks, real estate, or art. The tax rate for long-term capital gains is different from the tax rate for ordinary income. Long-term capital gains are the profits made on assets held for longer than a year.
For 2021, the tax rate for long-term capital gains is 0% for individuals in the 10% and 12% tax brackets, 15% for individuals in the 22%, 24%, 32%, and 35% tax brackets, and 20% for individuals in the 37% tax bracket.
Conclusion:
The federal tax system in the USA is complex, but understanding the tax brackets, deductions, and exemptions can help you save money while filing your income tax return. It is important to note that the information provided in this guide is for general knowledge only, and you should consult a tax professional for personalized advice.
Thank you for reading our comprehensive guide on breaking down federal tax brackets for 2021. We hope that this has helped you gain a better understanding of the US tax system.