2019 – 2021 Federal tax brackets & Marginal tax rates

The United States federal tax laws follow a progressive tax system with 2019-2020 marginal tax rates varying from 10% to 37%. Ordinary income, dividends, interest and short-term capital gains are taxed at this ordinary income tax rate. The table below shows how each additional dollar earned gets taxed by the U.S. government. This is for federal tax year 2020, which will be due in April of 2021.

2021 Marginal tax rates and filing status

 

 

 

Marginal Tax Rate	Single	Married, Filing Jointly	Married, Filing Separately	Head of Household
10%	$0 to $9,875	$0 to $19,750	$0 to $9,875	$0 to $14,100
12%	$9,876 to $39,475	$19,751 to $80,250	$9,876 to $40,125	$14,101 to $53,700
22%	$40,126 to $85,525	$80,251 to $171,050	$40,126 to $85,525	$53,701 to $85,500
24%	$85,526 to $163,300	$171,051 to $326,600	$85,526 to $163,300	$85,501 to $163,300
32%	$163,301 to $207,350	$326,601 to $414,700	$163,301 to $207,350	$163,301 to $207,350
35%	$207,351 to $518,400	$414,701 to $622,050	$207,351 to $311,025	$207,351 to $518,400
37%	$518,401 or more	$622,051 or more	$311,026 or more	$518,401 or more

If you are single taxpayer earning a taxable income of $100,000, you would fall in the 24% tax bracket. This 24% tax bracket does not mean that your entire income is taxed at 24%. This is only the marginal tax rate. Now, let us calculate your effective tax rate. Your first $9,700 is taxed at 10%, the next $29,775 is taxed at 12%, the next $44,725 gets taxed at 22% and your final $15,800 gets taxed at 24%. The total tax amounts to $18,174.50, making your effective tax rate equal to 18.17%.

Let’s look at another example where you file taxes jointly with your spouse and earn a total taxable income of $150,000. The first $19,400 gets taxed at 10%, your next $59,550 gets taxed at 12% and the final $71,050 gets taxed at 22%. This makes your total tax bill equal to $24,717, and thus your effective tax rate is 16.48%.

2021 Standard deductions

Single	Married, Filing Jointly	Married, Filing Separately	Head of Household
$12,550	$25,100	$12,550	$18,800

The above table shows the standard deductions that you can apply for tax year 2021. Here are some additional ways to save on tax.

Take as many tax deductions and credits as you can avail of. A tax credit will lower your payable tax, whereas a deduction will lower your taxable income and hence your tax bracket. For example, if you hold foreign stocks in your portfolio, you can receive a tax credit on taxes paid to a foreign government. On the other hand, if you earn $96,200 and file taxes as a single taxpayer, you can claim a standard deduction of $12,200 which will lower your taxable income to $84,000. This will move you from the 24% tax bracket to the 22% tax bracket. There is a long list of deductions and credits on the IRS website. Here is a small list that will help lower your taxes.

Lower your taxes

1. Invest as much as possible in your company 401k plan or an IRA. You will get the most benefit of growing your money without incurring any tax. However, make sure you have an emergency fund in a high yield savings account before contributing the maximum to a 401k. It’s difficult to withdraw without penalties from a 401k until you reach retirement age.
2. Home mortgage interest and property taxes are deductible up to a certain amount.
3. If you sell your investments within a year at capital gains, the gains are taxed at your ordinary tax rate. However, long term capital gains are taxed at a lower rate depending on your total income. So, one way to save on taxes is to hold investments for a long time.
4. If you own a business and have a home office, a lot of expenses can be tax deductible. For example, you can apply part of your mortgage interest, utility bills, rent, auto expenses, etc as deductions.
5. Interest on student loans are also tax deductible.
6. Additionally, you also may be able to offset capital gains by selling off some of your loss making investments before year end.

Here are some additional ways you can become wealthy.