The IRS Just Released New 2021 Tax Brackets. Here's What They Mean.

You might still be focused on surviving 2020, but when it comes to taxes, it doesn’t hurt to plan ahead.

This month, the IRS released updates to the tax code for tax year 2021. Though actual tax brackets remained the same (10%, 12%, 22%, 24%, 32% and 35%), income limits for each bracket were increased to account for inflation. The standard deduction for 2021 was also increased.

These changes will affect how much you pay when you file income taxes in 2022. Here’s a look at the 2021 tax brackets and other changes to personal taxes next year.

Tax Brackets For Tax Year 2021

Single filers:

• 10%: Up to $9,950
• 12%: Income of $9,951 to $40,525
• 22%: Income of $40,526 to $86,375
• 24%: Income of $86,376 to $164,925
• 32%: Income of $164,926 to $209,425
• 35%: Income of $209,426 to $523,600
• 37%: Income over $523,600

Married, filing jointly:

• 10%: Up to $19,900
• 12%: Income of $19,901 to $81,050
• 22%: Income of $81,051 to $172,750
• 24%: Income of $172,751 to $329,850
• 32%: Income of $329,851 to $418,850
• 35%: Income of $418,851 to $628,300
• 37%: Income over $628,300

Married, filing separately:

• 10%: Up to $9,950
• 12%: Income of $9,951 to $40,525
• 22%: Income of $40,526 to $86,375
• 24%: Income of $86,376 to $164,925
• 32%: Income of $164,926 to $209,425
• 35%: Income of $209,426 to $314,150
• 37%: Income over $314,150

Heads of household:

• 10%: Up to $14,200
• 12%: Income of $14,201 to $54,200
• 22%: Income of $54,201 to $86,350
• 24%: Income of $86,351 to $164,900
• 32%: Income of $164,901 to $209,400
• 35%: Income of $209,401 to $523,600
• 37%: Income over $523,600

Wondering about tax brackets for 2020? Take a look at them here.

What Do The 2021 Tax Brackets Mean?

Tax brackets are a way to ensure that the lowest-earning Americans aren’t forced to pay the same tax rate as higher earners. 

The U.S. follows a progressive tax system, meaning that portions of your income are taxed at different rates. So if you’re a single filer earning $80,000 per year, for example, you don’t actually pay 22% on that income. 

Instead, the first $9,950 of income is taxed at 10%. The next $9,951 to $40,525 of income is taxed at 12%. The last $39,425 of your income (income above $40,525) is what would be taxed at the highest rate of 22%.

Add up all those tax amounts ($995 + $3,669 + $8,673.50), and you end up with a total tax liability of $13,337.50, or about 16.7%.

To better understand how tax brackets impact your taxes for the year, there are a couple of numbers that are helpful to know. The first is marginal tax rate. This is the highest tax rate that you paid on your taxable income. In our example above, the highest tax rate on $80,000 in single-payer income is 22%.

Next is your effective tax rate, which is the average tax you paid on all of your income. Going back to our example, if you paid a total of $13,337.50 on $80,000 of income, your effective tax rate is about 16.7%. So as you can see, just because you fall into the 22% tax bracket (your marginal tax rate) above, it doesn’t mean you actually pay a full 22% of your income in taxes.

Also note that these tax brackets only apply your taxable income, which is what’s left over after subtracting your standard or itemized deductions, plus any other adjustments.

Standard Deduction Increased For 2021

In addition to updating income limits on tax brackets, the IRS also increased the standard deduction ― a flat dollar amount that decreases taxable income for everyone who doesn’t itemize.

For individuals and married couples filing separately, the standard deduction for tax year 2021 increased by $150 to $12,550. For married couples filing jointly, the deduction increased by $300 to $25,100. Finally, for heads of households, the deduction grew by $150, up to $18,800 for 2021.