Even though it’s still 2020, it never hurts to look to the future, especially when it comes to your taxes. The IRS recently released updates to the tax code for 2021, and while the actual tax brackets didn’t change (10%, 12%, 22%, 24%, 32%, and 35%), income limits were adjusted to account for inflation. For 2021, the IRS also increased the standard deduction.
These changes will not impact your taxes when you file in 2021 but will affect your taxes when you file in spring of 2022. Because the U.S. adheres to a progressive tax system, those who earn less pay less in taxes, and those who earn more pay more in taxes. How much you pay also depends on whether you file as a single filer, married filing jointly, married filing separately, or as head of household.
As just one example, if you earn $80,000 annually and choose to file as a single filer, you wouldn’t actually pay 22% of that income in taxes. Instead, your income would be taxed at 10% for the first $9,950. Then, the next $40,525 of your income would be taxed at 12%. Finally, the last $39,425 of your income would be taxed at 22% (the highest rate).
Keep in mind that these tax brackets are only applicable when it comes to your taxable income. This is what is left over after you subtract your itemized deductions (or if you take the standard deduction), as well as any other adjustments you qualify for.
If all of this sounds a little confusing, you are not alone. The tax code is complicated, and at Balanced Bookkeeping of NC, we are always here to clear up any questions you have about your personal and business taxes. Feel free to reach out to us today!