What Tax Bracket Am I In? | How Do Tax Brackets Work?Pat Fontana
The deadline to file your 2020 tax return was May 17. Now that you’ve completed and submitted all of those documents, it’s time to start thinking about optimizing your 2021 taxes. The tax system is complicated and seems to constantly change. However, with some basic knowledge you can be prepared for the new tax season. Do you know what tax bracket you’re in? Knowing how tax brackets work can help you understand your taxes a little better.
Seven Income Tax Brackets
The amount of tax you pay and the bracket you fall in depend on a progressive tax system. When you earn more and progress through the brackets, your income-tax rate will increase. The seven federal income tax brackets vary from year to year, in terms of income levels that fall within each bracket, as they are adjusted for inflation.
Each of the brackets is based on your taxable income. If you make $85,000 in a year, for example, that is your gross income. Your taxable income is then determined by any deductions you qualify for that will reduce the amount of your earning. The result will be the number that you’ll look for in the tax brackets.
The tax rates for each bracket remain steady from 2020 to 2021. What changes are the income levels specified for each tax rate. The seven tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. You could be in a different tax bracket for 2021 than you were in 2020, even if your income did not change. The amount of taxes you pay for 2021 would change accordingly.
Your filing status will also affect your tax rate and which bracket you are in for each year. Common filing statuses are single, married filing jointly, married filing separately, and head of household. Your status will depend on your marital status and whether you have qualifying dependents. Married couples often file jointly, but in some cases, such as when they are in the process of divorcing, will choose to file separately.
Sometimes a married couple may choose to file separately because of what is known as the marriage penalty. If the spouses’ incomes are similar, they may actually end up paying more taxes when filing jointly than if they were single. This penalty can be triggered when the minimum taxable income for the couple’s joint filing tax bracket is less than twice the minimum amount for a single filer’s bracket.
Although this issue used to affect the four highest tax brackets, for 2021, only the top tax bracket contains the marriage penalty trap. Those couples with a combined taxable income of more than $628,300 will face this potential penalty for their 2021 taxes.
How to Determine Your Tax Bracket
To determine what tax bracket you are in, you’ll need to do a few calculations. Add up all of your earnings from your job and any other income sources. Subtract out the income considered an exclusion by the tax code, such as life insurance proceeds. The result will be your gross income.
From that number, subtract your tax adjustments, including student loan interest and individual retirement account contributions. That number will be your adjusted gross income.
You will then subtract out your tax deductions, whether you itemize or take the standard deduction. For the 2021 tax year, the standard deduction for married couples filing jointly will be $25,100. For single taxpayers, and those married but filing separately, the standard deduction will be $12,550. For a head of household, the deduction will be $18,800.
The result will be your taxable income, which will determine your tax bracket based on your filing status.
CONTACT CLEAR VIEW BUSINESS SOLUTIONS FOR TAX HELP
Taxes can be complicated. To optimize your tax situation for 2021 and beyond, you can count on the professionals at Clear View Business Solutions to guide you through all of your options. We can help ensure that you are maximizing your available credits and deductions and minimizing your tax payment.
We work with you at tax time and throughout the year to help you be better prepared to make sound financial decisions and to plan for your success. Learn more about how we can help you and your business by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.