2021 Tax Brackets

On a yearly basis the IRS adjusts more than 40 tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. provisions for inflation Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . This is done to prevent what is called “bracket creep,” when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any increase in real income.

The IRS used to use the Consumer Price Index (CPI) as a measure of inflation prior to 2018.[1] However, with the Tax Cuts and Jobs Act of 2017, the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.[2]

These inflation adjustments are for tax year 2021, for which taxpayers will file tax returns in early 2022. Note that the Tax Foundation is a 501(c)(3) educational nonprofit and cannot answer specific questions about your tax situation or assist in the tax filing process.

2021 Federal Income Tax Brackets A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. and Rates

In 2021, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Tables 1). The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $523,600 and higher for single filers and $628,300 and higher for married couples filing jointly.

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Standard Deduction The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. and Personal Exemption

The standard deduction for single filers will increase by $150 and by $300 for married couples filing jointly (Table 2).

The personal exemption for 2021 remains eliminated.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.

The AMT uses an alternative definition of taxable income Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subject to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.

The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly (Table 3).

In 2021, the 28 percent AMT rate applies to excess AMTI of $199,900 for all taxpayers ($99,950 for married couples filing separate returns).

AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. In 2021, the exemption will start phasing out at $523,600 in AMTI for single filers and $1,047,200 for married taxpayers filing jointly (Table 4).

Earned Income Tax Credit (EITC)

The maximum Earned Income Tax Credit (EITC) in 2021 for single and joint filers is $1502, if the filer has no qualifying children (Table 5). The maximum credit is $3,618 for one child, $5,980 for two children, and $6,728 for three or more children. The credit for filers without qualifying children was significantly expanded for tax year 2021 in the American Rescue Plan Act (ARPA) enacted in March 2021.

Child Tax Credit A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.

The American Rescue Plan Act (ARPA) enacted in March 2021 significantly expanded the Child Tax Credit in several ways. The expansion expires after 2021. The Child Tax Credit (CTC) is $3,000 for children 6 and older and $3,600 for children under 6. Half the credit will be advanced to families monthly, at $250/month for older children and $300/month for younger children, while the other half will be received on tax returns. It is fully available and refundable to households with no income, unlike the Child Tax Credit’s former design. The changes only apply to tax year 2021.

Capital Gains Tax Rates (Long-Term Capital Gains)

Long-term capital gains are taxed using different brackets and rates than ordinary income.

Qualified Business Income Deduction (Sec. 199A)

The Tax Cuts and Jobs Act includes a 20 percent deduction for pass-through businesses against up to $164,900 of qualified business income for unmarried taxpayers and $329,800 for married taxpayers (Table 7).

Annual Exclusion for Gifts

In 2021, the first $15,000 of gifts to any person are excluded from tax. The exclusion is increased to $159,000 for gifts to spouses who are not citizens of the United States.

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