October 27, 2020

2021 Tax Brackets

 

On a yearly basis the IRS adjusts more than 40 tax provisions for inflation. 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]

2021 Federal Income Tax Brackets 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.

2021 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households
Rate For Unmarried Individuals For Married Individuals Filing Joint Returns For Heads of Households
10% Up to $9,950 Up to $19,900 Up to $14,200
12% $9,951 to $40,525 $19,901 to $81,050 $14,201 to $54,200
22% $40,526 to $86,375 $81,051 to $172,750 $54,201 to $86,350
24% $86,376 to $164,925 $172,751 to $329,850 $86,351 to $164,900
32% $164,926 to $209,425 $329,851 to $418,850 $164,901 to $209,400
35% $209,426 to $523,600 $418,851 to $628,300 $209,401 to $523,600
37% Over $523,600 Over $628,300 Over $523,600

Source: Internal Revenue Service

2021 Standard Deduction 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.

2021 Standard Deduction
Filing Status Deduction Amount
Single $12,550
Married Filing Jointly $25,100

Head of Household

$18,800

Source: Internal Revenue Source

2021 Alternative Minimum Tax

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 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).

2021 Alternative Minimum Tax Exemptions
Filing Status Exemption Amount
Unmarried Individuals $73,600
Married Filing Jointly $114,600

Internal Revenue Service

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).

2021 Alternative Minimum Tax Exemption Phaseout Thresholds
Filing Status Threshold
Unmarried Individuals $523,600
Married Filing Jointly $1,047,200

Source: Internal Revenue Source

2021 Earned Income Tax Credit

The maximum Earned Income Tax Credit in 2021 for single and joint filers is $543, if the filer has no 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. All these are relatively small increases from 2020.

2021 Earned Income Tax Credit Parameters
Filing Status   No Children One Child Two Children Three or More Children
Single or Head of Household Income at Max Credit $7,100 $10,640 $14,950 $14,950
Maximum Credit $543 $3,618 $5,980 $6,728
Phaseout Begins $8,880 $19,520 $19,520 $19,520
Phaseout Ends (Credit Equals Zero) $15,980 $42,158 $47,915 $51,464
Married Filing Jointly Income at Max Credit $7,100 $10,640 $14,950 $14,950
Maximum Credit $543 $3,618 $5,980 $6,728
Phaseout Begins $14,820 $25,470 $25,470 $25,470
Phaseout Ends (Credit Equals Zero) $21,920 $48,108 $53,865 $57,414

Source: Internal Revenue Source

2021 Child Tax Credit

The child tax credit totals at $2,000 per qualifying child and is not adjusted for inflation. However, the refundable portion of the Child Tax Credit is adjusted for inflation but will remain at $1,400 for 2021.

2021 Capital Gains Tax Rates & Brackets (Long-Term Capital Gains)

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

2021 Capital Gains Tax Rates & Brackets (Long-Term Capital Gains)
  For Unmarried Individuals, Taxable Capital Gains Over For Married Individuals Filing Joint Returns, Taxable Capital Gains Over For Heads of Households, Taxable Capital Gains Over
0% $0 $0 $0
15% $40,400 $80,800 $54,100
20% $445,850 $501,600 $473,750

Source: Internal Revenue Source

2021 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).

2021 Qualified Business Income Deduction Thresholds
Filing Status Threshold
Unmarried Individuals $164,900
Married Filing Jointly $329,800

Source: Internal Revenue Source

2021 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.

 

See 2020 Tax Brackets

See 2019 Tax Brackets

[1] Internal Revenue Service, “Revenue Procedure 2020-45,” https://www.irs.gov/pub/irs-drop/rp-20-45.pdf.

[2] Robert Cage, John Greenlees, and Patrick Jackman, “Introducing the Chained Consumer Price Index,” U.S. Bureau of Labor Statistics, May 2003, https://www.bls.gov/cpi/additional-resources/chained-cpi-introduction.pdf.

Banner image attribution: 1040 tax form lies near hundred dollar bills and blue pen on a light blue background. US Individual income tax return.

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A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

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.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

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 as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. Individual income taxes are the largest source of tax revenue in the U.S.

A capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.

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.

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.