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Each year, the U.S. Internal Revenue Service (IRS) adjusts tax brackets for changes in the cost of living to calculate federal tax liability. Because the U.S. economy typically faces inflation each year, the IRS adjusts tax brackets upward.
Tax Brackets
Tax brackets represent the dollar amount that stratifies taxable income. Tax rates change in the U.S. progressive tax system; tax brackets provide limit values with which the tax rate changes.
For instance, if a single individual earns a taxable income of $9,950 in 2021, they face a 10% tax rate for federal income purposes, resulting in a total tax of $995. However, if an individual earned $36,900, they pay 10% on $9,950 and 12% on the remaining $26,950, resulting in a federal tax liability of $4,229. Below are the 2021 federal income tax brackets:
| 2021 Federal Income Tax Brackets | |||
|---|---|---|---|
| Tax Rate | Single Filers | Married Filing Jointly | Heads of Household |
| 10% | up to $9,950 | up to $19,900 | up to $14,200 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 | $14,201 to $54,200 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 | $54,201 to $86,350 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 | $86,351 to $164,900 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 | $164,901 to $209,400 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 | $209,401 to $523,600 |
| 37% | $523,601 and above | $628,301 and above | $523,601 and above |
Inflation Adjustments
Every year, the IRS makes adjustments to personal exemption, standard deduction, tax brackets, and other tax credits to account for changes in the cost of living. Even though U.S. tax rates may remain the same, changing tax brackets, deductions, and credits affects the effective tax rate faced by individuals and corporations.
For tax year 2021, the IRS updated all tax brackets across all filing statuses, thus changing the effective tax rate. For example, the 10% tax bracket cutoff increased from $9,875 for 2020 to $9,950 for 2021, an increase of roughly 0.8%.
Below is a breakdown of the inflation adjustments across all tax brackets from 2020 to 2021. The increase in the bracket limits from 2020 to 2021 ranged anywhere from 0.71% to 1.0%, with the average increase being 0.95%.
| Tax Bracket Increases From 2020 to 2021 | |||
|---|---|---|---|
| Tax Rate | Single Filers | Married Filing Jointly | Heads of Household |
| 10% | 0.76% | 0.76% | 0.71% |
| 12% | 0.76% and 1.00% | 0.76% and 1.0% | 0.71% and 0.93% |
| 22% | 1.00% and 0.99% | 1.00% and 0.99% | 0.93% and 0.99% |
| 24% | 0.99% and 1.00% | 0.99% and 1.00% | 0.99% and 0.98% |
| 32% | 1.00% and 1.00% | 1.00% and 1.00% | 0.98% and 0.99% |
| 35% | 1.00% and 1.00% | 1.00% and 1.00% | 0.99% and 1.00% |
| 37% | 1.00% | 1.00% | 1.00% |