Tax brackets can seem like a burdensome social responsibility, especially when you get a raise. For people who are unclear on how it works in the United States, extra income could mean over taxation. However, because the United States operate a progressive tax system, tax brackets are not as bad you think.
What is a tax bracket?
A Tax bracket is a range for taxing taxable income according to increment in your earning in a progressive sequence. Essentially, the government taxes you per fractional dollar increment for the group or range of taxable income. In other words, different portions of your income incur taxation differently- The higher you earn, the higher your taxes.
Types of Tax brackets
According to the IRS, there are currently seven tax brackets: 10, 12, 22, 24, 32, 35, and 37percent, with progressively varying rates. Also, other factors besides your taxable income influence your tax bracket; your filing status, time of filing, and yearly economic policy.
For example, we consider a single filer for the 2020 tax bracket, which is due in April 2021. Here is what the tax bracket will look like according to the IRS announcement of tax inflation adjustments for the tax year 2021.
Tax Bracket Tax rate for a single filer
Tax Rate Tax Bracket
10% $0 – $9,875
12% $9,875 – $40,125
22% $40,126 – $85,525
24% $85,526 – $163,300
32% $163,301 – $207,350
35% $207,351 – $518,400
37% $518,401 or greater.
Types of filing status for tax brackets
As stated earlier, the IRS recognizes five categories of filing status that influence your tax bracket. Here are five of them and the class of individuals that constitute each filing status.
Single Filers
They include all single (unmarried), legally separated, and divorced people
Married joint filers
They are a married couple that decides to file jointly by combining their incomes and deducting their expenses.
Married separate filers
They are a married couple who decide to file separately to keep one income lower, especially when under an income repayment plan.
Head of Household Filing
This filing system involves a person who files on behalf of a set of unmarried people legally living together and has paid more than half the cost for the year.
Qualifying widow or widower
It involves a married couple who initially filled jointly until the sudden death of a spouse.
How Do Tax brackets work?
The tax bracket is a formula that the IRS employs to calculate how much taxes you owe according to how your income increases. Several people are quick to think that your tax bracket means the total taxable percentage for the particular bracket group they belong to on their taxable income.
For example, if you are single and earn $50,000, you are in the 22% tax bracket. However, you do not pay the complete 22% on your taxable income. Essentially, your tax is calculated progressively from the tiniest percentage stepwise across the tax brackets.
How to figure out your Tax bracket
As an employee, a look at your w-2 form shows how much withholdings you get per paycheck. Similarly, a 1099 form helps with tax filing for the self-employed and independent contractors for non-employment income.
In addition, whether you are an employee or self-employed, if you understand the calculation, you can figure out your tax bracket before filing. That way, you can easily plan your finances without owing the IRS and getting subjected to a tax audit.
Here is a practical/mathematical example to explain the calculation for figuring out tax brackets.
Assuming you are a single filer who earns $50,000, and we use the IRS announcement for tax inflation for the tax year 2021, here is how to calculate your tax bill.
-
First bracket taxation ($0-$9,875)
A tax rate of 10% gives us 10% X $9,875= $987.5
-
Second bracket taxation ($9, 876-$40, 125)
A tax rate of 12% gives us $40,125 minus $9,876 = $30,249
Therefore 12% X $30, 249= $3,629.88
-
Third bracket taxation ($40, 126- $50, 000 income limit)
A tax rate of 22% gives us $50, 000 minus $40, 126= $9, 874
Therefore 22% X $9, 874= $2, 172.28
The total tax bill for your tax bracket calculated progressively is the tax rates per tax bracket. Essentially, your total tax bill will be $987.5 + $3, 629.88+ $2, 172.28= $6, 789.66
Benefits of Tax brackets
While the pros and cons of the progressive tax system remain debatable, proponents of the tax brackets continue to espouse a few benefits of tax brackets. Here are three of them.
- It balances wealth distribution since higher-income earners pay higher taxes.
- It allows low-income earners to maintain a relatively balanced life without owing the IRS.
- The government can generate revenue without overburdening its citizens.
Final thought
Tax brackets are a tool for the IRS and provide an easy way to classify a person’s earnings. The reason is that the higher your earning, the higher your tax bracket. It means that each raise in your income can move you over to the next tax bracket. However, you only owe the IRS a percentage of the extra earning rather than the entire earning.
FAQS: What is the 2021 tax bracket?
What is the 2021 tax bracket?
According to the IRS, the tax bracket for 2021 is in seven percentage groups, depending on your taxable income and filing status. They include 10%, 12%, 22%, 24%, 32%, 35% and 37%. Essentially, your income is taxed progressively across the varying percentages.
How can I lower my taxable income?
You can lower your taxable income by diversifying your expenses meaningfully. Possible ways include contributing to a 401k, donating to charity, filing joint taxes if you are married, leveraging tax credits, and making savings for childcare.
Is filing jointly for taxes better than single?
The joint filing benefits married couples and helps them profit from several tax breaks. As a result, a joint filing keeps most married couples at the lowest percentile of the tax bracket. For example, the tax brackets for 2020 showed married couples occupying 10% on their first $19 750 of taxable income compared to those who file separately.
