How Do Marginal Income Tax Rates Work in 2021?
February 1, 2022
How Do Marginal Income Tax Rates Work in 2021?
Calculating Income Tax Liability
marginal tax rates, which may differ. Effective marginal tax
rates reflect the amount of tax paid on the next dollar of
For many individuals and families, calculating federal
income, taking into account interactions with other features
income tax liability can be broken down into three main
of the tax system. Thus, effective marginal tax rates are a
steps.
function of (1) a taxpayer’s statutory marginal tax rate; and
(2) interactions with credits, deductions, exemptions, and
1. Calculate the amount of income subject to
special provisions in the tax code.
marginal tax rates (i.e., taxable income).
Generally, this means adding up income from
Some taxpayers with more complex tax situations,
all sources (unless specifically excluded from
including those who are subject to the alternative minimum
taxation), and then subtracting any deductions
tax (AMT) and those who have income from capital gains
(e.g., above-the-line deductions and either the
and dividends, will have to perform additional steps to
standard deduction or sum of itemized
calculate their income tax liability. These cases are not
deductions).
discussed.
2. Apply marginal income tax rates to taxable
Applying Marginal Income Tax Rates
income to determine their “precredit” income
tax liability.
For the purposes of this In Focus, it is assumed that the
3. Subtract any tax credits from precredit income
taxpayer has a relatively simple tax situation: they are a
tax liability to determine final income tax
married couple who file their taxes jointly with only earned
income (e.g., wages and salaries). In addition, they claim
liability.
only one deduction—the standard deduction—and claim no
This In Focus focuses on the second step in this process—
tax credits. In reality, the calculation of taxable income for
applying marginal tax rates to taxable income. The
a taxpayer may not be so simple and will depend on a
examples below use marginal tax rates in effect in 2021
variety of factors, including the taxpayer’s sources of
(i.e., associated with 2021 income tax returns, generally
income, family structure, and eligibility for a variety of
filed in 2022).
deductions; i.e., subtractions from their income. For 2021,
the standard deduction for a married couple filing jointly is
The In Focus examines the mechanics of statutory marginal
$25,100.
tax rates and does not analyze the taxpayer’s effective
Figure 1. 2021 Marginal Income Tax Brackets for a Married Taxpayer Filing Jointly
Source: CRS
https://crsreports.congress.gov
link to page 1 link to page 2 link to page 2
How Do Marginal Income Tax Rates Work in 2021?
Once a taxpayer has calculated their taxable income,
above a given bracket threshold is taxed at a higher
marginal tax rates are applied to taxable income. There are
marginal rate. The 2021 tax brackets are presented
currently seven marginal tax rates, and the associated
graphically for a married couple filing a joint return in
income ranges over which they apply (“tax brackets”) differ
Figure 1. Due to space limitations, the graphics in this In
based on the taxpayer’s filing status. Tax filing status is a
Focus only display taxable income up to $1 million.
way to categorize taxpayers that is closely tied to marital
status, and in the case of unmarried taxpayers, whether they
Importantly, these tax rates apply only to the income in a
have any dependents. Tax filing status determines not only
specific income range or bracket, not the entire taxable
the tax brackets, but the amount and eligibility of a variety
income, as illustrated in the subsequent examples of
of other tax provisions, including the amount of the
married taxpayers with different levels of income. For
standard deduction.
example, if a married couple filing jointly has $750,000 of
taxable income, only the amount above $628,300—or
The federal income tax is considered a progressive tax by
$121,700—is subject to a marginal rate of 37%, not the
economists because as taxable income increases, income
entire $750,000.
Figure 2. Married Taxpayer Filing Jointly with $50,000 of Earned Income
Example 1: Married couple
with $50,000 of earned
income
First, the taxpayer wil subtract
$25,100 from their $50,000 of
income to calculate their taxable
income of $24,900.
As shown in Figure 2, this taxpayer
has a total income tax liability of
$2,590. The taxpayer’s statutory
marginal tax rate is 12%, and the
taxpayer’s last dol ar of income was
taxed at that rate. However, most of
the taxpayer’s income is taxed at a
rate of 10%, since most of the
taxpayer’s income falls within the
Source: CRS
lowest (10%) income tax bracket.
Figure 3. Married Taxpayer Filing Jointly with $350,000 of Earned Income
Example 2: Married couple
with $350,000 of earned
income
First, the taxpayer wil subtract
$25,100 from their $350,000 of
income to calculate their taxable
income of $324,900.
As shown in Figure 3, this taxpayer
has a total income tax liability of
$66,018. The taxpayer’s statutory
marginal tax rate is 24%, and the
taxpayer’s last dol ar of income was
taxed at that rate. However, more
than half of the taxpayer’s taxable
income is taxed at a rate lower than
24% (taxed at 10%, 12%, or 22%),
Source: CRS
since it falls in one of these lower tax
brackets.
IF12032
Margot L. Crandall-Hollick, Specialist in Public Finance
https://crsreports.congress.gov
How Do Marginal Income Tax Rates Work in 2021?
Disclaimer
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https://crsreports.congress.gov | IF12032 · VERSION 1 · NEW