Filing for tax season 2021 starts on February 12th. If that doesn’t light a fire that encourages you to start taking a look at your taxes for 2020, then maybe this statistic will: last year's average tax refund was more than $2,500.
This year, the IRS anticipates that those filing their taxes on-time can expect to receive a refund (if they’re owed one, of course) within 21 days of filing. So, if you know that the IRS owes you money this year, why not file early and receive your refund early, too?
Before filing, however, there are a few things you need to know, such as the tax brackets for 2021 and other relevant changes to tax rules and filing dates.
What’s the Definition of a Tax Bracket?
It might help to take a step back first, for those who are filing for the first time or who might need a refresher course on taxes. What are tax brackets?
Think of tax brackets more like “groups.” When deciding how much you owe in taxes, the government creates groups depending on your income. According to your annual income, they’ll assign you a tax rate, which is ultimately a percentage of your income. This method ensures that those who earn more are paying a higher percentage in taxes than those who don’t earn as much and can’t afford to pay a higher tax rate.
It’s important to note that the tax bracket that you fall into also depends on your filing status, which means whether you’re filing as:
- Single
- Married, filing jointly
- Married, filing separately
- Head of household
What Are the Tax Brackets for 2021?
Now, after determining your filing status (if you’re unsure, we suggest checking out the IRS’ helpful guide to “What’s My Filing Status?”), it’s time to figure out which tax bracket you fall into.
Here are the tax brackets for 2021 for those filing as single (not that the percentage is the rate at which you’ll be taxed, and the money value is the taxable income bracket):
- 10% on $0 to $9,950
- 12% on $9,950 to $40,525
- 22% on $40,526 to $86,375
- 24% on $86,376 to $164,925
- 32% on $164,926 to $209,425
- 35% on $209,426 to $523,600
- 37% on $523,601 or more
Now, what does this mean? Let’s say you earned $30,000 in 2020. That means that you’ll owe $995 (10% of the first tax bracket limit of $9,950) plus 12% of the amount over $9,950.
This means that you’re not paying a flat rate of 22% on all of your income, only the income over $9,950. Assuming you made $30,000, you’d owe 10% on the first $9,950 and 22% on the remaining $20,050. This means that you’d owe $950 plus $2,406 (12% of the remaining $20,050) for a total of $3,356.
That number, however, is before factoring any deductions or tax credits you might be able to apply! Keep in mind that, with the standard deduction (which is $12,550 for single taxpayers in 2021), the amount of tax you owe would decrease significantly.
Tax Changes for 2021 (Plus Other Things to Consider)
It’s important to understand that the tax brackets above are for all single taxpayers. Consult the IRS breakdown of 2021 tax brackets for information regaridng married taxpayers and heads of households.
Also, it’s critical to note that, if you’re filing as a self-employed individual, you’ll need to factor in the cost of self-employment tax, which is 15.3% (12.4% for social security and 2.9% for Medicare. Normally, an employer would pay this, but since you’re self-employed, you’re responsible for paying this tax.
What other changes can you expect for 2021 tax season? The biggest change is to the Earned Income Tax Credit. The basic qualifications for the EITC are fairly easy to meet, but the point is that in 2021, the tax credit will increase by $66 to $6,660. Last year, it was $6,728.
401(k) contribution and IRA contribution limits won’t change this year, and the standard deduction has only been raised by $150 for single taxpayers and $300 for married taxpayers filing jointly.
Saving During Tax Season
Want to know how to save money during tax season 2021? Aside from analyzing your tax bracket in-depth and working with a great tax advisor who can find ways for you save via deductions or credits, we suggest getting a Cheese Debit Card!
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