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What is My Tax Bracket and How Can I Lower It?

what-is-my-tax-bracket-and-how-can-i-lower-it

Taxes – not the most popular topic of conversation unless you work at an accounting firm, but still a serious reality we all have to deal with. When you file your annual federal income tax return you’re going to want to pay as little as legally possible. To understand how much you can be taxed you need to know your tax bracket. You can use that information to strategically lower your tax bill.

Identify Your Tax Filing Status First 

First things first – you need to figure out what your filing status is. The four most common tax-filing statuses are:

  1. Single filer – you are not married or you are legally separated from your spouse through a divorce
  2. Married filing jointly – you are married and agree to file your taxes with your spouse. This means your income is combined when you file
  3. Married filing separately – you are married but you and your spouse will file separately. This is commonly done when couples are in the process of getting a divorce or need to reduce their student loan payments
  4. Head of household– you are unmarried and you paid for both a qualifying dependent who lived in your home along with half the cost of your home for the year. This is commonly used by single parents or those caring for relatives

Once you identify your status, you can review the tax bracket that fits based on your income. 

Find Your Federal Income Tax Brackets for 2020 for Filing in 2021

A tax bracket is a range of income in which you will pay a specific tax rate. How much you pay depends on your income and filing status. 

The following tax brackets contain the tax rates for 2020 and apply to those filing in April of 2021 or October of 2021 with the extension. These brackets are for federal income tax only. Individual states with state income tax each have their own tax requirements as well. 

Single Filers

Tax Bracket Taxable Income   What You Will Pay
10% $0 to $9,875 10% of taxable income
12% $9,876 to $40,125 $987.50 plus 12% of the amount over $9,875
22% $40,126 to $85,525 $4,617.50 plus 22% of the amount over $40,125
24% $85,526 to $163,300 $14,605.50 plus 24% of the amount over $85,525
32% $163,301 to $207,350 $33,271.50 plus 32% of the amount over $163,300
35% $207,351 to $518,400 $47,367.50 plus 35% of the amount over $207,350
37% $518,401 or more $156,235 plus 37% of the amount over $518,400

Married Filing Jointly 

Tax Bracket Taxable Income   What You Will Pay
10% $0 to $19,750 10% of taxable income
12% $19,751 to $80,250 $1,975 plus 12% of the amount over $19,750
22% $80,251 to $171,050 $9,235 plus 22% of the amount over $80,250
24% $171,051 to $326,600 $29,211 plus 24% of the amount over $171,050
32% $326,601 to $414,700 $66,543 plus 32% of the amount over $326,600
35% $414,701 to $622,050 $94,735 plus 35% of the amount over $414,700
37% $622,051 or more $167,307.50 plus 37% of the amount over $622,050

Married Filing Separately 

Tax Bracket Taxable Income   What You Will Pay
10% $0 to $9,875 10% of taxable income
12% $9,876 to $40,125 $987.50 plus 12% of the amount over $9,875
22% $40,126 to $85,525 $4,617.50 plus 22% of the amount over $40,125
24% $85,526 to $163,300 $14,605.50 plus 24% of the amount over $85,525
32% $163,301 to $207,350 $33,271.50 plus 32% of the amount over $163,300
35% $207,351 to $311,025 $47,367.50 plus 35% of the amount over $207,350
37% $311,026 or more $83,653.75 plus 37% of the amount over $311,025

Head of Household 

Tax Bracket Taxable Income   What You Will Pay
10% $0 to $14,100 10% of taxable income
12% $14,101 to $53,700 $1,410 plus 12% of the amount over $14,100
22% $53,701 to $85,500 $6,162 plus 22% of the amount over $53,700
24% $85,501 to $163,300 $13,158 plus 24% of the amount over $85,500
32% $163,301 to $207,350 $31,830 plus 32% of the amount over $163,300
35% $207,351 to $518,400 $45,926 plus 35% of the amount over $207,350
37% $518,401 or more $154,793.50 plus 37% of the amount over $518,400

Please note that each tax year, the federal government revises tax brackets based on inflation and they are published on the Internal Revenue Service (IRS) website

Understand How Tax Brackets Work

The term ‘tax bracket’ refers to the tax rate you will pay based on your filing status and income. The tax bracket system is designed to ensure those who make more pay more in federal income taxes. This is called a ‘progressive tax system’ and it attempts to fairly distribute the tax strain on households.  

For example, when someone says “I am ‘in’ the 12% tax bracket”, what they mean is that they will be paying the 12% tax rate determined by the IRS for that tax year. The rate they pay will not be a flat 12% on all income because the IRS taxes in proportion to the bracketing system.  Let’s review what this might look like below. 

Example of How Tax Brackets Work

Let’s say that Susan is a single filer and makes $45,000 per year. This would put her in the 22% tax bracket. Susan will not pay the flat 22% (marginal tax rate) on her $45,000. Instead, her federal income tax bracket would break down like this: 

  • 10% on the first $9,875 of her income 
  • 12% on the income between $9,875 and $40,125
  • 22% on the income between $40,125 and $45,000

The result would be her effective tax rate, which is how much she will actually pay in taxes. Susan is benefitting by being taxed at the lower brackets first and if she takes the standard deduction she will have a tax liability of about $3,714. 

Determine Your Taxable Income

Your taxable income is the total amount you will pay federal taxes on for a given year. It is also referred to as your adjusted gross income. To find your taxable income you will need to: 

  • Find your gross income (the total money coming into your home for the year both earned and unearned)
  • Subtract your allowable tax deductions and exemptions for the year from your gross income

This is your taxable income. The good news is that your accountant, tax professional, or tax filing software will calculate this number for you based on the information you provide. 

Get Into a Lower Tax Bracket If Possible 

You can lower your tax bracket by lowering your taxable income. You can take advantage of tax credits you’re eligible for, such as childcare. These are quite literally credits that are taken off your tax bill. 

You also want to review your deductions. If your deductions add up to more than the standard deduction, then it is generally worth it to ‘itemize deductions’. Common ways to lower your tax bracket through deductions include:

  • Contributions to a Health Savings Account (HSA)
  • Contributions to qualifying retirement accounts 
  • Charitable contributions 

For example, if you increase contributions to an Individual Retirement Account (IRA) you are likely to lower your overall tax bill. Work with your financial planner to strategize how you might lower your tax bracket through allowable IRS credits and deductions.

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