This question often gets asked right as tax season begins. But familiarizing yourself with tax brackets as soon as they get released for the current year is actually the best course of action.
Because it is a key factor in determining how much federal income tax you will pay. And the sooner you know, the sooner you can manage your money wisely.
What is a Tax Bracket?
In short, a tax bracket reveals the amount of federal taxes you will pay that year. Typically, the higher your income, the higher the amount of federal income taxes you will pay and vice versa. This progressive tax system adjusts every year to account for inflation, so it’s imperative that you review the new tax bracket with each year. A simple Google search will provide you with the corresponding tax bracket for the year you need.
|Rate||For Single 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%||$523,601 or more||$628,301 or more||$523,601 or more|
|Source: Internal Revenue Service|
Understanding Your Tax Bracket
To fully understand where you fall in a tax bracket, you need to have in mind your yearly income and your filing status – that is, single, married filing jointly, married filing separately, or head of household.
Consider the tax bracket for the 2021 tax year. In the top row, identify your filing status, then find your yearly income in the corresponding column. For example, let’s say you are filing as a single individual who makes $41,000 a year. A common misconception is that your entire yearly income will be taxed at 22%. THIS IS INCORRECT. Here is how to accurately calculate your tax rate:
According to the tax bracket, the first $9,950 is taxed at 10%, the next $30,574 is taxed at 12%, and then only the additional $476 is taxed at 22%, NOT the entire $41,000. In short, you are only taxed by the amount over each bracket.
If you know how much you could potentially owe, this can help you make adjustments to your finances during that tax year.
How to Lower Your Tax Bracket
First and foremost, tax planning is the most effective way to lower your taxable income and, thus, lower your tax rate. If you’d like to learn more about tax planning and how it will benefit you, contact us.
As you begin working with us, we may find that taking tax deductions can help you to lower your tax rate. These tax deductions can include, but are not limited to, the student loan interest deduction, mortgage interest deduction, charitable donations deduction, IRA contribution deduction, etc. By making the best use of all the tax deductions that you can legally claim, you can reduce your taxable income. If your taxable income is reduced enough, you’ll be put into a lower tax bracket and, consequently, you’ll pay less in taxes.
Tax credits can also be helpful. While they won’t lower your taxable income and thus put you in a lower tax bracket, they can reduce your tax bill after tax brackets are taken into account. Some tax credits include, the child tax credit, adoption credit, American Opportunity Tax credit, etc. Tax credits may even be more effective in lowering your overall tax bill than tax deductions.
The Next Steps
So you may be wondering: What now? What tax credits and deductions are available to me personally? How can I lower my tax bill?
These questions are not easy to answer on your own. But we can help! David Alfano is not just a CPA – he’s also a financial advisor who specializes in tax planning! Why not schedule your complimentary consultation to see how our tax planning services can benefit you? Send us an email at firstname.lastname@example.org or give us a call at 203-698-7700 for more information.