Assume you are single and have taxable income of $90,000 in 2021. Given that $90,000 falls under the 24 percent tax band for individuals, would your tax bill just be a flat 24 percent of $90,000 – or $21,600? No! In reality, your tax would be less than that amount. This is because, when utilizing marginal tax rates, only a part of your income would be taxed at the 24% rate. The remainder would be taxed at ten percent, twelve percent, and twenty-two percent rates.
This is how the IRS tax bracket works. Again, if you’re single with a taxable income of $90,000 in 2021, the first $9,950 of your income is taxed at 10% for a total tax of $995. The following $30,575 in income (from $9,951 to $40,525) is taxed at a rate of 12%, amounting to an extra $3,669 in tax.
Following that, the following $45,850 of your income (from $40,526 to $86,375) is taxed at the 22 percent rate for a total tax of $10,087. That leaves just $3,625 of your taxable income (the amount above $86,375) to be taxed at the 24% rate, amounting to an additional $870 in tax. When you tally everything together, your total tax for 2021 is just $15,621. (This is $5,979 less than if the full $90,000 was taxed at a flat 24 percent rate.)
Assume you’re a billionaire (we can all wish, right?). If you’re single, only your income above $523,600 in 2021 will be taxed at the highest rate (37 percent ). The remainder will be taxed at reduced rates, as previously specified. So, for a single individual in 2021, the tax on $1 million is $334,072. That’s a lot of money, but it’s still $35,928 less than if the 37 percent rate were applied to the whole $1 million (resulting in a $370,000 tax payment).
The Marriage Punishment
The discrepancy in bracket ranges might occasionally result in a “marriage penalty.” This tax-law quirk requires some married couples filing jointly tax brackets to pay more tax than if they were single (usually, if the spouses’ earnings are comparable). The penalty is triggered when the minimum taxable income for the joint filers’ tax bracket is less than double the minimum amount for the single filers’ bracket for any particular rate.
Is the top tax rate going to be raised?
Will the highest marginal tax rate be raised in the foreseeable future? If President Biden had his way, it will. As part of his American Families Plan, the president has suggested raising the top tax rate from 37% to 39.6%, where it was before to the Tax Cuts and Jobs Act of 2017. Single filers with taxable income exceeding $452,700 and joint filers with taxable income exceeding $509,300 would be subject to the 39.6 percent rate. (It should be noted that the marriage penalty would remain in effect for the top bracket under the president’s plan.) Try the tax bracket calculator to see what bracket you’re in.
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