The Huffington Post writes, “You might still be focused on surviving 2020, but when it comes to taxes, it doesn’t hurt to plan ahead.” There are some people who plan all year and work with professionals like an accountant and a Fee-Only financial advisor. Others might start thinking about the following year’s taxes after the winter holidays.
At the end of last month, the IRS shared changes to the tax code that will be in place for 2021. The tax brackets did not change but they did adjust the income amounts for each bracket because of inflation.
We tend to gripe about having to pay taxes and do not really understand how the tax system in the U.S. operates. The understanding may not make you excited to pay but it can help when you do your financial planning. As Fox Businessexplains, “These rates are in effect for 2021 and will be used to prepare your tax returns in 2022.” And in order to strategize for the 2021 tax year, you need to be armed with information before the 2021 gets underway.
The U.S. tax system is progressive and this means people pay a progressively higher percent of their income as they earn more. The article gives an example:
“…if you’re a single filer earning $80,000 per year,…the first $9,950 of income is taxed at 10%. The next $9,951 to $40,525 of income is taxed at 12%. The last $39,425 of your income (income above $40,525) is what would be taxed at the highest rate of 22%.”
The IRS also announced that the standard deduction has increased for 2021. If you are single, head of household, or married filing separately, your standard deduction will increase by $150. The standard deduction for married couples that file jointly will increase by $300.