Adjustments to the CPI Affect the American Tax Rates and Income Brackets
This past week, the U.S. Bureau of Labor Statistics released the updated chained Consumer Price Index (CPI) for the 12-month period ending August 31. The CPI affects a number of tax items that are adjusted annually for inflation, including the US income tax brackets, standard deduction amounts, penalty amounts, the maximum foreign earned income exclusion, and a number of other expat tax basic items.
American Tax Rates – Generally
At the most basic level, US income tax rates are determined as a function of marginal US income tax rates as applied to certain tax brackets that depend on one’s filing status.
The American tax rates themselves generally do not shift from year to year and are determined by Congressional legislation. Following the Trump Tax Reform in 2017, the marginal tax rates for ordinary income are 10%, 12%, 22%, 24%, 32%, 35% and 37%. For beneficial long-term capital gains and qualifying dividends, the rates are 0%, 15%, and 20%.
The US income tax brackets, which are the ranges of income subject to a particular marginal rate, do shift from year to year due to annual inflation rooted in changes to the CPI.
US Income Tax Brackets for the 2021 Tax Year – Ordinary Income
Based on the recently-released CPI, the 2021 tax year US income brackets for ordinary income have been calculated to be as follows:
Married Filing Jointly:
| If taxable income is: | The tax is: |
|---|---|
| Not over $19,900 | 10% of taxable income |
| Over $19,900 but not over $81,050 | $1,990 plus 12% of the excess over $19,900 |
| Over $81,050 but not over $172,750 | $9,328 plus 22% of the excess over $81,050 |
| Over $172,750 but not over $329,850 | $29,502 plus 24% of the excess over $172,750 |
| Over $329,850 but not over $418,850 | $67,206 plus 32% of the excess over $329,850 |
| Over $418,850 but not over $628,300 | $95,686 plus 35% of the excess over $418,850 |
| Over $628,300 | $168,993.50 plus 37% of the excess over $628,300 |
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Head of Household:
| If taxable income is: | The tax is: |
|---|---|
| Not over $14,200 | 10% of taxable income |
| Over $14,200 but not over $54,200 | $1,420 plus 12% of the excess over $14,200 |
| Over $54,200 but not over $86,350 | $6,220 plus 22% of the excess over $54,200 |
| Over $86,350 but not over $164,900 | $13,293 plus 24% of the excess over $86,350 |
| Over $164,900 but not over $209,400 | $32,145 plus 32% of the excess over $164,900 |
| Over $209,400 but not over $523,600 | $46,385 plus 35% of the excess over $209,425 |
| Over $523,600 | $156,355 plus 37% of the excess over $523,600 |
Married Filing Separately:
| If taxable income is: | The tax is: |
|---|---|
| Not over $9,950 | 10% of taxable income |
| Over $9,950 but not over $40,525 | $995 plus 12% of the excess over $9,950 |
| Over $40,525 but not over $86,375 | $4,664 plus 22% of the excess over $40,525 |
| Over $86,375 but not over $164,925 | $14,751 plus 24% of the excess over $86,375 |
| Over $164,925 but not over $209,425 | $33,603 plus 32% of the excess over $164,925 |
| Over $209,425 but not over $314,150 | $47,843 plus 35% of the excess over $209,425 |
| Over $314,150 | $84,496.75 plus 37% of the excess over $314,150 |
US Income Tax Brackets for the 2021 Tax Year – Capital Gains and Qualifying Dividends
The 2021 tax year US income brackets for capital gains and qualifying dividends have been calculated to be as follows:
| Tax Rate | Married File Jointly | Married File Separately | Head of Household | Single |
|---|---|---|---|---|
| 0% | $0-80,800 | $0-40,400 | $0-54,100 | $0-40,400 |
| 15% | $80,801- $501,600 |
$40,401- $250,800 |
$54,101- $473,750 |
$40,401- $445,850 |
| 20% | More than $501,600 |
More than $250,800 |
More than $473,750 | More than $445,850 |
Tax Items Other than American Tax Rates
Other US expat tax items that have been recalculated for the 2021 tax year include:
- The Standard Deduction will be increased to $25,100 for married joint filers; $12,550 for single filers and married separate filers; and $18,800 for head of household filers.
- For gifts made and estates of decedents dying in 2021, the exclusion amount will be $11,700,000 (up from $11,580,000 for gifts made and estates of decedents dying in 2020).
- For gifts made in 2021, the annual exclusion for gifts to noncitizen spouses will be $159,000 (up from $157,000 for 2020).
- The foreign earned income exclusion maximum amount will be $108,700 in 2021 (up from $107,600 in 2020). The foreign housing cost exclusion will be $15,218 in 2021 (up from $15,064 in 2020).
Given that the above amounts are estimations based on the updated CPI, we will update these numbers once official numbers are announced by the IRS. We further note that upcoming political events in the US (the Presidential and Congressional elections) may have a significant effect on the above tax items, so it remains to be seen how the 2021 tax year will ultimately shake out.
