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How to Determine Your Top IRS Tax Bracket for 2021

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There are currently seven graduated tax brackets people who file Form 1040 to choose from. But which is the right one for your clients' 2021 taxes? In the first of a three-part series, Julian Block helps accountants explain to taxpayers their brackets by exploring each in depth. 

Feb 18th 2021
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Just before Santa descended chimneys in 2017, Congress passed and then-president Trump signed the Tax Cuts and Jobs Act (TCJA). It’s a wide-ranging overhaul of the Internal Revenue Code that turned out to be his most significant legislative accomplishment.

The TCJA’s centerpiece for individuals was a reduction of their taxes for 2018 and beyond. But the legislation left unchanged the number of tax brackets for individuals. There continue to be seven graduated brackets for Form 1040s for calendar year 2021 that will be filed in 2022.

The brackets still are “indexed,” meaning the IRS adjusts them annually to reflect inflation, just the same as it adjusts the standard deduction amounts for nonitemizers who don’t use Form 1040’s Schedule A to itemize their outlays for thing like medical expenses, state and local income and property taxes and interest payments for mortgages on personal residences.

Another benefit of indexing: It mitigates a much-maligned phenomenon known as “bracket creep” that bumps people into higher brackets, though their real incomes remain unchanged.

The brackets begin at 10 percent on “taxable income” (line 15 of the 1040 for calendar year 2020). This is the amount that remains after wages, pensions, IRA distributions, Social Security benefits and other kinds of reportable income are offset by write-offs on Schedule A or standard deduction amounts claimed by nonitemizers, along with all other allowable deductions, and before any credits are claimed.

The above-10-percent brackets ascend in six stages—12, 22 (nearly double the preceding 12), 24, 32 (a whopping 33 percent higher than the preceding 24) and 35 percent. They top off at 37 percent. This first of three columns explains brackets 10, 12, 22, 24 and 32 percent.

10 percent. Use the first of the seven brackets for taxable income of up to: $9,950 for singles and married persons filing separate returns; $19,900 for married persons filing joint returns and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse dies); and $14,200 for heads of household.

12 percent. Use the second of the seven brackets for income between: $9,951 and $40,525 for singles and marrieds filing separately; between $19,901 and $81,050 for joint filers and surviving spouses; and between $14,201 and $54,200 for heads of household.

22 percent. Use the third of the seven brackets for income between: $40,526 and $86,375 for singles and marrieds filing separately; between $81,051 and $172,750 for joint filers and surviving spouses; and between $54,201 and $86,350 for heads of household.

24 percent. Use the fourth of the seven brackets for income between: $86,376 and $164,925 for singles and marrieds filing separately; between $172,751 and $329,850 for joint filers and surviving spouses; and between $86,351 and $164,900 for heads of household.

32 percent. Use the fifth of the seven brackets for income between: $164,926 and $209,425 for singles and marrieds filing separately; between $329,851 and $418,450 for joint filers and surviving spouses; and between $164,901 and $209,400 for heads of household.

There’s more that needs to be covered. I’ll do it in parts two and three. Part two covers the top two brackets of 35 and 37 percent. It also explains how the IRS determines tax tabs for filers whose incomes fall into several brackets.

Part three is a reminder for accountants, financial planners and other advisers whose client rosters include high-income individuals. They should alert their clients to strategies that sidestep or minimize Medicare surtaxes.

True, official rates top out at 37 percent for clients who are recipients of ordinary income from sources like salaries and other types of compensation; pensions; and distributions from IRAs, 40l (k)s, and other tax-deferred retirement accounts. But their unofficial rates could go higher if they’re in top brackets above 22 percent.

Why? Because they might be liable for the Medicare surtaxes of 0.9 percent on earned income and 3.8 percent on investment income.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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