What are the tax brackets?

 

Tax questions often have complex answers and the question of federal tax brackets is no different. When someone asks about the tax brackets in 2021, they could be referring to a number of different types of rates. Is it the capital gains tax rate, dividend tax rate, marginal tax rate, Medicare tax rate, social security tax rate, bonus tax rate, the withholding tax rate on bonuses (what some people think of as a “bonus tax rate”) you’re looking for?

Not sure which one? Don’t worry! We’ll outline the types of tax rates and the situations when you’ll encounter them in this post.

The basics on federal income tax rates

Federal income tax rates are divided into seven segments commonly known as income tax brackets. All taxpayers pay increasing income tax rates as their income rises through these segments. If you’re trying to determine your marginal tax rate or your highest federal tax bracket, you’ll need to know two things:

  • Your filing status: The filing status options are to file as single, married filing jointly, married filing separately, head of household, or qualified widow.
  • Your taxable income: Believe it or not, your taxable income doesn’t equal your wages. Rather, it’s the total of your taxable income sources (like wages, investment interest, and retirement distributions) minus any adjustments and tax deductions. Most income is taxed using these seven tax brackets, except for certain capital gains and dividends.

Need help determining this number? Find out how to calculate your taxable income.

Tax brackets in 2021

If you’re wondering, “What tax bracket am I in?” The tax bracket-specific income ranges can shift slightly each year due to inflation adjustments, so you’ll want to reference the year when you review income tax brackets. Here we outline the 2021 tax brackets.

Note: The brackets for Qualifying Widow(ers) are the same as for Married Filing Jointly status.

 2021 tax brackets
RateSingleMarried Filing SeparatelyMarried Filing JointlyHead of Household
Taxable income over . . .
10%            $0            $0            $0            $0
12%    $9,950    $9,950  $19,900  $14,200
22%  $40,525  $40,525  $81,050  $54,200
24%  $86,375  $86,375$172,750  $86,350
32%$164,925$164,925$329,850$164,900
35%$209,425$209,425$418,850$209,400
37%$523,600$314,150$628,300$523,600

Understanding how federal income tax brackets work

The nuances of federal income tax brackets can seem complex on first glance. So, if you’re asking yourself, “how do tax brackets work?”, here’s more detail.

Once you know your filing status and amount of taxable income, you can find your tax bracket. However, you should know that not all of your income is taxed at that rate. For example, if you fall in the 22% tax bracket, not all of your income is taxed at 22%. Why is that? The reason is that the U.S. income tax system uses a graduated tax system, designed so that individual taxpayers pay an increasing rate as their income rises as outlined in the 2021 tax brackets above.

Let’s look at Sarah, whose filing status is “Single” and who has a taxable income of $50,000. Using the 2021 information above, we can determine Sarah’s total tax in the following steps:

  1. Figure out the amount of tax for each segment of taxable income. Sarah will pay:
    • 10% on the first $9,950 of taxable income
    • 12% on the next $30,575 ($40,525-$9,950)
    • 22% on the remaining $9,475 ($50,000-$40,525)
  2. Add the taxable amounts for each segment ($995 + $3,669 + $2,085) = $ 6,749

For 2021 tax returns, Sarah will pay $6,749 in tax. While the tax brackets apply to $50,000 and the average rate is 13.5%, Sarah’s total income is $62,550 ($50,000 taxable income + $12,550 standard deduction) and the rate based on her total income would be 10.8% ($6,749 ÷ $62,550). Her marginal tax rate is 22%.

So, what’s the difference between all these different percentages and rates?  Read on and we’ll explain.  Want more guidance? Review the 2021 tax tables listed by the IRS.

Income tax rate terms

The terminology around income tax brackets and tax rates can be confusing at times. To clarify what’s meant, let’s review a few relevant terms that relate to this topic.

  • Income tax rate: The various percentages at which taxes are applied
  • Income tax brackets: The ranges of income to which a tax rate applies (currently there are seven)
  • Marginal tax rate: The rate at which the last dollar of income is taxed
  • Effective tax rate: The total tax paid as a percentage of total income taxed
  • Average tax rate: This is the same as the effective tax rate.  If you’re looking for the average federal income tax rate that most taxpayers pay, that’s a harder number to pin down as it changes every year.  The average tax rate in 2018 was 13.29%, according to the IRS; You can also review average tax rate details in this chart

In addition to these definitions, it’s helpful to understand that the table above shows ordinary tax rates. However, ordinary tax rates don’t apply to every type of income. For other types of income, they follow a different rate structure than the table above. We’ll outline those next.

Other types of tax rates

Now, let’s get to the other tax rates. There are a few places where you might find these categories: on your investment or broker statements.

Capital gains tax rates and dividend tax rates

When you receive a quarterly investment statement, it may show that you were paid capital gains or dividends. To know what dividend or capital gain tax rate applies here, you should also look at the timeframes involved.

  • Long-term capital gains refer to assets sold for a profit that were held for more than one year. The specific rates depend on your taxable income, but it’s not the same as the percentages listed above. Use the table lower in this section to determine your rate.
  • Short-term capital gains refer to assets sold for a profit that were held for one year or less. These gains are taxed just the same as ordinary income, so you can refer to the federal income tax rates above.
  • Qualified dividend income refers to income held for a certain period. For a dividend to be a qualified dividend, you must have held the asset for more than 60 days during the 121-day period starting 60 days before the ex-dividend date. Qualified dividend income is taxed the same rate as long-term capital gains, so it will also follow the rates shown in the table below.
  • Ordinary dividend income refers to income that doesn’t meet the qualified dividend income criteria above. These dividends, just like short-term capital gains, are taxed as ordinary income. Refer back to the federal income tax rates above.

2021 tax rates: Long-term capital gains (LTCG) and Qualified dividend income (QDI)

LTCG and QDI tax ratesSingleMarried Filing SeparatelyMarried Filing JointlyHead of Household
0%Up to $40,400Up to $40,400Up to $80,800Up to $54,100
15%$40,401 to $445,850$40,401 to $250,800$80,801 to $501,600$54,101 to $473,750
20%Above $445,850Above $250,800Above $501,600Above $473,750

Note: Gains on the sale of collectibles (e.g., antiques, works of art and stamps) are taxed at a maximum rate of 28%.

Social security tax rate and FICA tax rates

When you look at your paycheck, you can see taxes that are taken out of your take-home pay for various reasons. We’ll cover those in this section.

Social Security and Medicare taxes fall under the Federal Insurance Contributions Act (FICA) taxes. When you want to know the FICA tax rate, you should refer to the two categories below.

Currently, the:

  • Social Security tax rate is 6.2%. This is for the employee portion of these taxes. Employers also pay half of these taxes, so you can add another 6.2% to get the total Social Security tax rate.
  • Medicare tax rate is 1.45%. This is for the employee portion of the taxes.

There are some limits and exceptions to Social Security and Medicare tax rates. Get the details in our payroll tax article.

Bonus tax rate (bonus tax withholding rate)

The last category of taxes you might see on your paycheck stub is for any bonus or supplemental wages you received. What most people think of the bonus tax rate is actually a percentage of tax withheld from pay in certain circumstances:  prizes and awards, certain commissions, overtime pay, back pay, and reported tips.

The bonus tax withholding rate is a flat 22% as long as the amount paid is under $1 million. If it’s over that amount, the bonus tax rate jumps to 37%. Keep in mind, the FICA taxes mentioned above will also apply to your bonus payment.

What if the bonus tax withholding rate is higher than your income tax bracket? You’ll be able to account for that on your tax return and possibly receive money back as a refund if too much was withheld.

Have questions about tax rates?

If you’re looking to understand how various federal tax rates will affect your tax filing outcome, check out H&R Block’s income tax calculator so you can plan ahead.

If you want to understand how the changes to the tax brackets affect you or learn how you may be able to lower your taxable income, the knowledgeable tax pros at H&R Block can help.

Learn more about the ways to file your taxes with H&R Block.

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