Marginal tax rate and definition of 2021

“TAX” in capital letters

With the 2021 tax deadline fast approaching, it is not too early to familiarize yourself with the relevant federal tax brackets. The Internal Revenue Service (IRS) adjusts them each year based on changes in the cost of living. These changes can impact your tax payment strategy. With that in mind, here are the marginal tax rates for the year 2021. A financial advisor can help you with tax planning. Find an advisor today.

What is a marginal tax rate?

A marginal tax rate is the amount of additional tax you incur for additional levels of income. The United States has a progressive tax system. So the more money you earn, the higher the tax bracket of your income. The exact range then determines the tax rate you actually pay, although theoretically those who earn more income are subject to a higher tax burden. In turn, this means that you, as a taxpayer, are keeping less money per dollar earned than you would have below your income level.

Your marginal tax rate applies only to your taxable income. This means that it is fund-based once you subtract your standard or itemized deductions from your gross annual income.

But it is not taxed at a flat rate. For example, suppose you earn $ 100,000 in taxable income in 2021. $ 100,000 hits the 24% tax bracket for single filers, but that doesn’t mean you’re hit with a 24% tax bill. %. Marginal tax rates only apply to the portion of income that falls directly into that bracket.

To illustrate, let’s say you earned $ 9,960 in taxable income in 2021. You would pay 10% on the first $ 9,950. It’s $ 995. Then you would pay 12% on the remaining $ 10 for $ 1.20 in taxes. Overall, you pay $ 996.20 in taxes over the course of the year.

Marginal tax rate compared to effective tax rate

Marginal and effective tax rates help taxpayers know how much they owe the IRS. But, the effective tax rates are slightly different.

Effective tax rates are based on your annual income and your total income tax. To find yours, just take the latter and divide it by your gross annual income. The result is the percentage of the annual income that you have to pay in taxes.

For example, if a person earned $ 150,000 this year, that person would pay $ 37,500 in taxes to the IRS. As a result, their effective tax rate would be 25%, which means that person pays 25% of their income in taxes.

In contrast, marginal rates are progressive and include seven tax brackets. As a general rule of thumb, the more you earn, the more you should use marginal rates as a measurement tool. If you find that your income is in one of the lower brackets, you can probably use the effective rate more reliably.

2021 marginal tax rates

Marginal tax rates consist of seven brackets of 10%, 12%, 22%, 24%, 32%, 35% and 37%. Where you stand will depend on your filing status (single, married couple declaring jointly, head of family) and the amount of your annual income.

Here are the marginal tax rates for 2021, according to the IRS:

Marginal tax rates for 2021 Tax rate Single filers Declaring spouses heads of household 10%? $ 9,950? $ 19,900? $ 14,200 12%> $ 9,950> $ 19,900> $ 14,200 22%> $ 40,525> $ 81,050> $ 54,200 24%> $ 86,375> $ 172,750> $ 86,350 32%> 164,925 $> $ 329,850> $ 164,900 35%> $ 2,209,425> $ 418,850> $ 209,400> $ 628,600> $ 5,28,600

Remember: you don’t pay a fixed percentage of your overall income with marginal tax rates. Instead, you spread your income as it falls into each tax bracket. Then you pay the corresponding rate on that specific income bracket. Thus, your first dollars receive the lower rate and the last dollars receive the higher rate.

Ways to lower your tax bill

There are several ways to reduce your taxable income. The right method, however, may depend on your financial and personal circumstances. Here are some suggestions worth considering:

Set up an education savings fund

Calculator with tax documents 2021

Calculator with tax documents 2021

For example, some may reduce their tax bill by creating an education savings fund. When you contribute to a 529 plan, one of the ways to save for tuition, you can potentially take advantage of state-level tax deductions. Plus, distributions and earnings made through the account increase tax-free when you use them for qualifying expenses.

Saving for retirement

Retirement accounts offer similar opportunities. When you fund accounts like 401 (k) and IRA, you are doing so with pre-tax dollars. Thus, contributing to it decreases your taxable income for the year. Health savings accounts (HSA) allow you to benefit from the same benefit but also for medical expenses.

Make a charitable contribution

Alternatively, you can make charitable donations to lower your tax bill. Donating assets or money to a qualified non-profit organization allows you to reduce the amount of your taxable income. This requires you to itemize your tax deductions, however.

However, if you take the standard deduction in 2021, you can deduct up to $ 300 per qualifying contribution income return. There is $ 300 left for other filing statuses other than married couples filing jointly, which can deduct up to $ 600.

Reap investment losses

Harvesting tax losses is a strategy investors often use to limit their short-term capital gains, thereby offsetting their tax liability. Essentially, you sell investments that have an unrealized loss and report those losses. This can help you significantly lower your tax bill, as short-term capital gains may receive higher tax rates than long-term capital gains.

Short-term gains tend to be equal to your usual tax bracket rate, while a long-term gains tax rate is 0%, 15%, or 20%.

Using tax credits

There are various tax credits available for a number of Americans. It’s a dollar for dollar reduction on the taxes you owe, not just your taxable income. They can apply at the federal or state level, depending on their type.

As they vary in type, they help a wide range of citizens. For example, families who adopt children can use the federal adoption credit to offset the costs of adoption.

The bottom line

Male accountant preparing taxes

Male accountant preparing taxes

While it would be nice if the tax rules remained the same from year to year, this is often not the case. They are subject to change due to factors such as current events and inflation. It is therefore essential to review the requirements before the start of tax season. Knowing and planning your tax rate can help you plan your finances in advance.

Tips for filing your taxes

  • A well-planned tax strategy can help you save money every year. This is where a financial advisor comes in. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.

  • Understanding your finances is the key to a tight tax strategy. Use our tax calculators, like the Federal Income Tax Calculator and the Property Tax Calculator, you can plan ahead and achieve your goals.

  • It is also recommended that you check out the best tax filing software available. With technology on your side, you can smooth the whole process.

Photo credit: © iStock.com / Eoneren, © iStock.com / Krystsina Yakubovich, © iStock.com / Stella_E

The marginal tax rate and the post-2021 definition first appeared on the SmartAsset blog.

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