The year 2021 is looking a lot like 2020, at least in terms of taxes.
The IRS released its inflation adjustments for 2021 federal income tax rates and brackets. While these changes are unlikely to have a huge impact on your bottom line, there are a few things you should be aware of.
Because these are the 2021 tax rates, they’ll determine your tax bill that will be due in 2022. You’ll use 2020 rates and brackets when you file your taxes on or before May 17, 2021. That’s 32 days later than usual due to the tax deadline extension.
How the 2021 Tax Brackets Break Down
There are seven tax brackets that range from 10% to 37%. The 2020 and 2021 tax brackets break down as follows:
Unmarried Individuals
| Tax Bracket | Taxable Income for 2020 (use when you file in 2021) | Taxable income for 2021 (use when you file in 2022) |
|---|---|---|
| 10% | Up to $9,875 | Up to $9,950 |
| 12% | $9,875 to $40,125n | $9,950 to $40,525 |
| 22% | $40,125 to $85,525 | $40,525 to $86,375 |
| 24% | $85,525 to $163,300 | $86,375 to $164,925 |
| 32% | $163,300 to $207,350 | $164,925 to $209,425 |
| 35% | $207,350 to $518,400 | $209,425 to $523,600 |
| 37% | Over $518,400 | Over $523,600 |
Married Individuals Filing Jointly or Surviving Spouses
| Tax Bracket | Taxable income for 2020 (use when you file in 2021) | Taxable income for 2021 (use when you file in 2022) |
|---|---|---|
| 10% | Up to $19,750 | Up to $19,900 |
| 12% | $19,750 to $80,250n | $19,900 to $81,050 |
| 22% | $80,250 to $171,050 | $81,050 to $172,750 |
| 24% | $171,050 to $326,600 | $172,750 to $329,850 |
| 32% | $326,600 to $414,700n | $329,850 to $418,850 |
| 35% | $414,700 to $622,050n | $418,850 to $628,300 |
| 37% | Over $622,050 | Over $628,300 |
Heads of Household
| Tax Bracket | Taxable income for 2020 (use when you file in 2021) | Taxable income for 2021 (use when you file in 2022) |
|---|---|---|
| 10% | Up to $14,100 | Up to $14,200 |
| 12% | $14,100 to $53,700n | $14,200 to $54,200 |
| 22% | $53,700 to $85,500 | $54,200 to $86,350 |
| 24% | $85,500 to $163,300 | $86,350 to $164,900 |
| 32% | $163,300 to $207,350 | $164,900 to $209,400 |
| 35% | $207,350 to $518,400 | $209,400 to $523,600 |
| 37% | Over $518,400 | Over $523,600 |
Not sure of your filing status? This interactive IRS quiz can help you determine the correct status. If you qualify for more than one, it tells you which one will result in the lowest tax bill.
Tax rates apply to the income within each bracket. So if you’re an unmarried individual with taxable income of $50,000, you won’t pay 22% of that $50,000 to Uncle Sam.
According to the 2021 tax brackets (the ones you’ll use for next year’s return), you’d pay:
- 10% on the first $9,950
- 12% on the next $30,575 ($40,525 – $9,950 = $30,575)
- 22% on the next $9,475 ($50,000 – $40,525 = $9,475)
2 Tax Changes That Could Affect You in 2021
The modified tax brackets aren’t the only changes for 2021. About 60 tax provisions were adjusted in the new year. A few highlights:
- The standard deduction will rise slightly: For 2020, the standard deduction is $12,400 for single filers and people who are married filing separately. In 2021, it will rise by $150 to $12,550 for single taxpayers. For those who are married filing jointly, the standard deduction will rise by $300, from $24,800 in 2020 to $25,100 in 2021.
- Some limited-income families can get an extra $68. The maximum Earned Income Tax Credit will increase in 2021 to $6,728, from $6,660 in 2020. You need at least three children to qualify for the maximum amount.
3 Tax Rules That Aren’t Changing in 2021
- IRA contribution limits won’t change. The traditional IRA and Roth IRA contribution limits will remain at $6,000 for people under 50. The extra $1,000 “catch-up” contribution the IRS allows people 50 and older to make won’t change either. You can still fund your IRA for 2020 until tax day, which is May 17, 2021.
- 401(k) contribution limits aren’t changing either: If you have an employer-sponsored tax-deferred retirement plan, like a 401(k) or 403(b), your maximum contribution is still $19,500 in 2021. The additional “catch-up” contribution workers ages 50 and older can make will also remain at $6,500.
- There’s no limit on itemized deductions. The Tax Cuts and Jobs Act of 2017 suspended these limits.
Ready to Start Your 2021 Tax Prep?
If you’re ready to dive into your taxes, you can check out this comprehensive summary of 2021 tax changes courtesy of the IRS.
Even if you’re not ready to jump into 2021 tax planning mode just yet, keep in mind it’s a good time to check your tax withholdings and make adjustments if necessary. Just make sure you file your return or ask for an extension by the May 17 deadline. If you can’t afford your tax bill for 2020, it’s essential that you file a tax return anyway and ask for an IRS payment plan.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]
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