Taxes also to be decided by several Nov. 3 ballot initiatives
Standard & itemized tax deductions for the 2021 tax year

2021 inflation-adjusted income tax brackets

Inflation as highway sign

It's that time of the tax year when things start coming at us fast.

We just wrapped up the 2019 tax return filing season, giving us around two months to focus on tax moves to make before year's end to lessen the 2020 tax-year bite.

Then each fall the Internal Revenue Service throws a ton of numbers at us that change things for the soon-to-arrive next tax year.

C'mon, taxman! Sure, we've all learned to multitask, but really? Now? Do we really need this huge 2021 data dump at the end of a crazy COVID-19 tax year where we already had to spend much more time than we wanted dealing with our pandemic-affected taxes?

Yes, we do. Really.

Planning means comparing: Effective tax planning means knowing how your current tax year's circumstances might change in the upcoming one.

Comparing the numbers will help you determine, for example, whether you should postpone some earnings into 2021, where the income tax brackets are a bit wider, so you won't be bumped into a higher one on your 2020 return.

And what about deductions? It could be better, based on the current and next year's standard amounts, for you to shift some deductible tax expenses from this year into the next or vice versa and itemize.

So, yes, the IRS annual inflation adjustments are useful. They also are intimidating.

Parceling out the many changes: The myriad figures are detailed in two IRS official documents. This year, that's a four-page notice on tax-affected retirement amounts and a 28-page revenue procedure with all the other cost of living tax changes.

If you want to sort through that material all at once, feel free to click on the above links and have at it.

However, I like to take things a bit more deliberately. That's why for the last few years, I've broken these announcements into the ol' blog's annual 10-part series on what the new inflation figures mean to major tax provisions.

In addition to keeping me from rambling on and on and on about the beaucoup adjustments, the 10 separate posts also will give me a chance to elaborate on each affected tax area.

If you're a tax geek like me, and I'm guessing you are since you're reading this, the series will give you, like me, the chance to savor these types of details for each tax portion. Plus, instead of have to scroll through a gigantic post, you can just read (or bookmark) the segments that appeal to and/or affect your personal tax filing and planning situation.

Just keep in mind as you peruse these numbers that the 2021 inflation amounts are what you'll use to file next year's return in 2022. That's why in these posts, I'll also include for comparison the 2020 tax year amounts, which apply to the return you'll file by next April 15.

OK, enough tax inflation introduction. I'm starting to tip-toe into TL;DR territory in this first 2021 inflation series post! So let's cut to the chase with Part 1, a look at next year's tax brackets.

Same rates, different income amounts: We saw some tax code changes this year in connection with coronavirus economic relief. But the basic individual income tax structure set out under 2017's Tax Cuts and Jobs Act (TCJA) wasn't touched.

So we're still looking at seven tax rates and how much of our earnings falls into each of the tax brackets.

The table below shows what the rates will be for 2021 and the income ranges their tax brackets encompass.

2021 Individual Tax Rates and Income Brackets
YOU WILL USE THESE TAX RATES AND INCOME BRACKETS 
WHEN COMPLETING YOUR 2021 TAX RETURN TO BE FILED IN 2022.

 Tax
 Rate

 Single

 Head of
 Household

 Married
 Filing Jointly or
 Surviving Spouse

 Married
 Filing
 Separately

 10%

 Up to $9,950

 Up to $14,200

 Up to $ 19,900

 Up to $9,950

 12%

 $9,951 to 
 $40,525

 $14,201 to 
 $54,200

 $19,901 to
 $81,050

 $9,951 to
 $40,425

 22%

 $40,526 to 
 $86,375

 $54,201 to
 $86,350

 $81,051 to
 $172,750

 $40,426 to
 $86,375

 24%

 $86,376 to 
 $164,925

 $86,351 to
 $164,900

 $172,751 to
 $329,850

 $85,376 to
 $164,925

 32%

 $164,926 to
 $209,425

 $164,901 to
 $209,400

 $329,851 to
 $418,850

 $164,926 to
 $209,425

 35%

 $209,426 to
 $523,600

 $209,401 to
 $523,600

 $418,851 to
 $628,300

 $209,426 to
 $314,150

 37%

 $523,601 
 or more

 $523,601
 or more

 $628,301
 or more

 $314,151 
 or more


And here are the 2020 tax year rates and income tax brackets that will apply to this year's tax return you'll file in 2021.

2020 Individual Tax Rates and Income Brackets
YOU WILL USE THESE TAX RATES AND INCOME BRACKETS 
WHEN COMPLETING YOUR 2020 TAX RETURN TO BE FILED IN 2021.

 Tax
 Rate

 Single

 Head of
 Household

 Married
 Filing Jointly or
 Surviving Spouse

 Married
 Filing
 Separately

 10%

 Up to $9,875

 Up to $14,100

 Up to $ 19,750

 Up to $9,875

 12%

 $9,876 to 
 $40,125

 $14,101 to 
 $53,700

 $19,751 to
 $80,250

 $9,876 to
 $40,125

 22%

 $40,126 to 
 $85,525

 $53,701 to
 $85,500

 $80,251 to
 $171,050

 $40,126 to
 $85,525

 24%

 $85,526 to 
 $163,300

 $85,501 to
 $163,300

 $171,051 to
 $326,600

 $85,526 to
 $163,300

 32%

 $163,301 to
 $207,350

 $163,301 to
 $207,350

 $326,601 to
 $414,700

 $163,301 to
 $207,350

 35%

 $207,351 to
 $518,400

 $204,101 to
 $518,400

 $414,701 to
 $622,050

 $207,351 to
 $311,025

 37%

 $518,401 
 or more

 $518,401
 or more

 $622,051
 or more

 $311,026 
 or more


If you just haven't had enough tax numbers, you also can check out the ol' blog's special page on tax rates and income brackets through the years.

Progressive tax rates pay off: By increasing the income amounts to which each of the current seven tax rates apply, you'll be able to make more money without your tax bill growing so much.

Your final tax bill also is kept under relative control thanks to our progressive tax rate system. Your earnings are taxed at all the rates that apply to your income, not just at the top rate that applies to the last dollar you earn.

Applying the just announced 2021 tax brackets, here's how it works, using a single taxpayer — let's call her Kathy — as an example.

Kathy's annual income is $100,000. That would put her in the 24 percent tax bracket. But her tax bill isn't 24 percent of $100,000 or $24,000.

Under our progressive tax system, the first chunk of Kathy's 2021 earnings, up to $9,950, is taxed at 10 percent. The next tax rate, 12 percent, applies her earnings of $9,951 to $40,525.

Her pay from $40,526 to $86,375 is taxed at 22 percent. And the last $13,625 Kathy will make in 2021 will be taxed at 24 percent.

That means her taxes break out as:

  $9,950

x

10%

=

$995

$30,575

x

12%

=

$3,669

$45,850

x

22%

=

$10,087

$13,625

x

24%

=

$3,270

And Kathy's total tax bill in 2021 will come to $18,021.

Of course, this basic, for-illustration-purposes-only example doesn't take into account the deductions (standard or itemized) that Kathy can claim, or any other tax breaks that could reduce her taxable income.

But wait, there's more: Many of those deductions and adjustments to income and tax credits that Kathy and you and I can use also see their amounts adjusted for inflation. So, as promised (or threatened if you're still not ready to deal with a new tax year), I'll be back in the coming days with more inflation adjusted tax changes for 2021.

You can get a preview of what's coming up in the ol' blog's tax inflation series in the directory below. When those posts go live, I'll add the links here. This first post is linked in the index.

You'll also see a couple of other links that are already live.

Back in May, the IRS announced the 2021 inflation amounts for high deductible health plans (HDHPs) and associated health savings accounts (HSAs), which I'll touch on again in Part 5, the medical tax inflation category.

Similarly, the Social Security Administration (SSA) also has released the 2021 wage base amount. This income figure affects the Social Security part of the Federal Insurance Contributions Act (FICA) payroll taxes, so it gets a mention in Part 7 of this series.

But up next in Part 2 is the always popular examination of the standard deduction amounts. It's not too much of a spoiler to say that they, like the income brackets in today's 2021 inflation series opener, will be bumped up a bit, too.

  1. 2021 tax rates and income brackets
  2. Standard deduction amounts, itemized deduction issues and the still sort-of around personal exemption
  3. Retirement, pension plan contribution limits and a special tax credit
  4. Credits, deductions & income exclusions (including, but not limited to, adoption assistance, Lifetime Learning Credit, Earned Income Tax Credit, educators' expenses and student loan interest above the line income adjustments)
  5. Medical-related tax provisions (including, but not limited to, flexible spending accounts, health savings accounts and long-term care premiums)
  6. Estate and gift tax limits, kiddie tax and capital gains tax income brackets
  7. Alternative Minimum Tax (AMT) exemption amounts, Social Security wage base and the nanny tax
  8. International worker tax issues, such as foreign income and housing exclusions
  9. Tax penalties, for both individuals and tax pros (including extended non-filing, missed information returns and pulled passports)
  10. Standard mileage deduction rates (issued separately, and later, by the IRS)

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Comments

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revanche @ a gai shan life

As always, thanks Kay! It's always nice to get up to date on the next year's planning here.

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