Taxes can be the single largest expense you have in retirement. Knowing your federal income tax bracket empowers us to pick the tax minimization strategy that saves you the most on taxes in the future.
What tax bracket am I in? Read below to learn more!
A tax bracket is a range of income that is subject to a defined income tax rate. Depending on your taxable income, you may fall into one of seven income tax brackets, each with a tax rate ranging from 10 percent to 37 percent.
Notice we said “taxable income.” That’s your adjusted gross income minus the standard deduction or allowable itemized deductions; whichever you choose when you file your taxes. Your income up to your standard deduction amount is not subject to tax.
Each of the seven tax brackets are the same for 2021 as they were in 2020: 10%, 12%, 22%, 24%, 32%, 35% and 37%, respectively. However, the Internal Revenue Service (IRS) makes more than 40 tax adjustments every year to account for inflation.
The reason for the adjustments is to prevent “bracket creep.” That’s when a taxpayer’s income moves them into a higher tax bracket, but inflation prevents them from realizing true gains. Inflation also reduces the value of tax credits and deductions. The potential result of the provision adjustments is they could wind up placing you in a new tax bracket, with a different tax rate on some of your income.
2021 Federal Income Tax Brackets: Rates for Single, Married Filing Jointly, Heads of Household
Keep in mind, the IRS’ tax system is progressive; it taxes higher-income earners at a higher average tax rate than lower-income earners. The system imposes marginal tax rates, which means only a portion of your income is taxed at the rates for your bracket.
Here’s an example of marginal tax rates in action. Let’s say you and your spouse enjoy a combined taxable income of $125,000 and you’re filing jointly. According to the table, you’re in the 22% tax bracket. If the IRS were to use an average tax rate, your tax bill would be $27,500. But by using marginal tax rates, only some of your income would be subject to the highest marginal tax rate, 22% in this example. The rest of the income is subject to the lower marginal tax rates, 10%, and 12% respectively.
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Most of us accept that we must pay taxes. However, no one wants to pay more than they have to. You can minimize your taxes in the future through effective retirement planning and investment strategies.
Now is the best time to plan for your ideal retirement; one that includes your lifestyle aspirations, income generation, and legacy protection.
It all starts with a conversation. Contact Aspen Creek Wealth Strategies today to schedule a meeting with a team member and begin your financial transformation now.