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A rate schedule is a chart that helps United States taxpayers determine their federal income tax for a particular year. [1] [2] Another name for "rate schedule" is "rate table". [1]
The origin of the current rate schedules is the Internal Revenue Code of 1986 (IRC), [2] [3] which is separately published as Title 26 of the United States Code. [4] With that law, the U.S. Congress created four types of rate tables, all of which are based on a taxpayer's filing status (e.g., "married individuals filing joint returns," "heads of households"). [2] [5] [6]
Each year the United States Internal Revenue Service (IRS) updates rate schedules in accordance with guidelines that Congress established in the IRC. [7] [8] In general, the IRS bases such adjustments on inflation and cost of living increases in the previous year. [9]
The tax rate schedules give tax rates for given levels of taxable income. There is a complex relationship between taxable income and actual income, making it difficult to draw conclusions from the tables. Even the marginal tax rates are misleading because there are various laws that relate taxable income to actual income such that an increase of a dollar of actual income results in an increase of more or less than a dollar in taxable income depending on the circumstances surrounding the increase, thus making the marginal tax rate dependent on an individual taxpayer's personal situation.
These schedules apply only to regular US income tax, whereas there is a second income tax, the Alternative Minimum Tax, that uses a different schedule. A taxpayer's tax obligation is the higher of those two income taxes, which makes drawing conclusions from the table even more difficult.
All rate schedules have an identical format, containing four columns and seven rows (called "brackets"). [2] The first two columns indicate the range of taxable income that a taxpayer must have to qualify for a particular tax rate. The third column indicates the tax rate itself. [2] The fourth column gives the range of income to which the current marginal rate applies.
Given that Congress has prescribed a system of progressive taxation, all but the lowest-earning taxpayers pay distinct rates for different parts of their income. [10]
The following are the IRS rate schedules for 2021: [11]
Schedule X — Single
| If taxable income is over-- | But not over-- | The tax is: | of the amount over-- |
|---|---|---|---|
| $0 | $9,950 | 10% | $0 |
| $9,951 | $40,525 | $995.00 + 12% | $9,950 |
| $40,526 | $86,375 | $4,663.88 + 22% | $40,525 |
| $86,376 | $164,925 | $14,750.66 + 24% | $86,375 |
| $164,926 | $209,425 | $33,602.42 + 32% | $164,925 |
| $209,426 | $523,600 | $47,842.10 + 35% | $209,425 |
| $523,601 | no limit | $157,803.00 + 37% | $523,600 |
Schedule Y-1 — Married filing jointly or qualifying widow(er)
| If taxable income is over-- | But not over-- | The tax is: | of the amount over-- |
|---|---|---|---|
| $0 | $19,900 | 10% | $0 |
| $19,901 | $81,050 | $1,990.00 + 12% | $19,900 |
| $81,051 | $172,750 | $9,327.88 + 22% | $81,050 |
| $172,751 | $329,850 | $29,501.66 + 24% | $172,750 |
| $329,851 | $418,850 | $67,205.42 + 32% | $329,850 |
| $418,851 | $628,300 | $95,685.10 + 35% | $418,850 |
| $628,301 | no limit | $168,992.25 + 37% | $628,300 |
Schedule Y-2 — Married filing separately
| If taxable income is over-- | But not over-- | The tax is: | of the amount over-- |
|---|---|---|---|
| $0 | $9,875 | 10% | $0 |
| $9,876 | $40,125 | $987.50 + 12% | $9,875 |
| $40,126 | $85,525 | $4,617.38 + 22% | $40,125 |
| $85,526 | $163,300 | $14,605.16 + 24% | $85,525 |
| $163,301 | $207,350 | $33,271.16 + 32% | $163,300 |
| $207,351 | $311,025 | $47,366.84 + 35% | $207,350 |
| $311,026 | no limit | $83,652.74 + 37% | $311,025 |
Schedule Z — Head of household
| If taxable income is over-- | But not over-- | The tax is: | of the amount over-- |
|---|---|---|---|
| $0 | $14,100 | 10% | $0 |
| $14,101 | $53,700 | $1,410.00 + 12% | $14,100 |
| $53,701 | $85,500 | $6,161.88 + 22% | $53,700 |
| $85,501 | $163,300 | $13,157.66 + 24% | $85,500 |
| $163,301 | $207,350 | $31,829.42 + 32% | $163,300 |
| $207,351 | $518,400 | $45,925.10 + 35% | $207,350 |
| $518,401 | no limit | $154,792.25 + 37% | $518,400 |
Caution: These tables shown above are accurate for 2021 only and do not apply for any other year.
To use a rate schedule, a taxpayer must know their filing status and amount of taxable income. [12] Definitions related to one's filing status can be found in IRC § A.2(a-b), and general guidelines regarding taxable income are described in IRC § A.63(a-b). [13] Once a taxpayer has made these determinations, he (1) references the pertinent rate schedule, (2) finds the appropriate bracket (based on her taxable income), and (3) uses the formula described in the third column to determine his federal income tax.
Assume, for example, that Taxpayer A is single and has a taxable income of $175,000 in 2021. The following steps apply the procedure outlined above:
(1) Because he is single, the pertinent rate table is Schedule X. [2]
(2) Given that his income falls between $164,296 and $209,425, he uses the fifth bracket in Schedule X. [2]
(3) His federal income tax will be "$33,602.42 plus 32% of the amount over $164,295." [2] Applying this formula to Taxpayer A, one arrives at the following result:
$33,602.42 + (0.32 * ($175,000 - $164,295)) =
$33,602.42 + (0.28 * https://en.wikipedia.org/wiki/Standard_deduction$85,650) =
$33,602.42 + $3,425.60 = $37,028.02.
Accordingly, Taxpayer A must pay $37,028.02 in federal income taxes for 2021. Since his income is in the fifth bracket, his marginal tax rate for each additional dollar he earns is 32%, but his effective tax rate is 21% ($37,028.02/$175,000 is .212).
General:
The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2020, taxes collected by federal, state, and local governments amounted to 25.5% of GDP, below the OECD average of 33.5% of GDP.
Under United States tax law, the standard deduction is a dollar amount that non-itemizers may subtract from their income before income tax is applied. Taxpayers may choose either itemized deductions or the standard deduction, but usually choose whichever results in the lesser amount of tax payable. The standard deduction is available to individuals who are US citizens or resident aliens. The standard deduction is based on filing status and typically increases each year, based on inflation measurements from the previous year. It is not available to nonresident aliens residing in the United States. Additional amounts are available for persons who are blind and/or are at least 65 years of age.
A child tax credit (CTC) is a tax credit for parents with dependent children given by various countries. The credit is often linked to the number of dependent children a taxpayer has and sometimes the taxpayer's income level. For example, with the Child Tax Credit in the United States, only families making less than $400,000 per year may claim the full CTC. Similarly, in the United Kingdom, the tax credit is only available for families making less than £42,000 per year.
The United States federal government and most state governments impose an income tax. They are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An Alternative Minimum Tax (AMT) applies at the federal and some state levels.
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), was an important income tax case before the United States Supreme Court. The Court held as follows:
The Household and Dependent Care Credit is a nonrefundable tax credit available to United States taxpayers. Taxpayers that care for a qualifying individual are eligible. The purpose of the credit is to allow the taxpayer to be gainfully employed. This credit is created by 26 U.S. Code (U.S.C) § 21, section 21 of the Internal Revenue Code (IRC).
The Hope credit, provided by 26 U.S.C. § 25A(b), was available to taxpayers who have incurred expenses related to the first two years of post-secondary education. For this credit to be claimed by a taxpayer, the student must attend school on at least a part-time basis. The credit can be claimed for education expenses incurred by the taxpayer, the taxpayer's spouse, or the taxpayer's dependent. Starting with tax year 2009, the Hope credit had been supplanted by the more generous American Opportunity Tax Credit.
Under United States federal income tax law, filing status determines which tax return form an individual will use and is an important factor in computing taxable income. Filing status is based on marital status and family situation.
Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. In other words, because the IRS allows a taxpayer to deduct the depreciation of an asset from the taxpayer's ordinary income, the taxpayer has to report any gain from the disposal of the asset as ordinary income, not as a capital gain.
In United States income tax law, an installment sale is generally a "disposition of property where at least 1 loan payment is to be received after the close of the taxable year in which the disposition occurs." The term "installment sale" does not include, however, a "dealer disposition" or, generally, a sale of inventory. The installment method of accounting provides an exception to the general principles of income recognition by allowing a taxpayer to defer the inclusion of income of amounts that are to be received from the disposition of certain types of property until payment in cash or cash equivalents is received. The installment method defers the recognition of income when compared with both the cash and accrual methods of accounting. Under the cash method, the taxpayer would recognize the income when it is received, including the entire sum paid in the form of a negotiable note. The deferral advantages of the installment method are the most pronounced when comparing to the accrual method, under which a taxpayer must recognize income as soon as he or she has a right to the income.
The Doctrine of Cash Equivalence states that the U.S. Federal income tax law treats certain non-cash payment transactions like cash payment transactions for federal income tax purposes. The doctrine is used most often for deciding when cash method taxpayers are to include certain non-cash income items. Another doctrine often used when trying to determine the timing of the inclusion of income is the constructive receipt doctrine.
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Qualified residence interest is the most significant exception to the limitations imposed by § 163(h) of the Internal Revenue Code.
Qualified Production Activities Income is a class of income which is entitled to favored tax treatment under Section 199 of the United States Internal Revenue Code.
In the United States tax system, the two-percent haircut, otherwise known as the two-percent floor, is a limitation on miscellaneous itemized income tax deductions and is codified under Internal Revenue Code IRC § 67(a).
For tax accounting, Half-year convention is a principle of United States taxation law.
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Commissioner v. Banks, 543 U.S. 426 (2005), together with Commissioner v. Banaitis, was a case decided before the Supreme Court of the United States, dealing with the issue of whether the portion of a money judgment or settlement paid to a taxpayer's attorney under a contingent-fee agreement is income to the taxpayer for federal income tax purposes. The Supreme Court held when a taxpayer's recovery constitutes income, the taxpayer's income includes the portion of the recovery paid to the attorney as a contingent fee. Employment cases are an exception to this Supreme Court ruling because of the Civil Rights Tax Relief in the American Jobs Creation Act of 2004. The Civil Rights Tax Relief amended Internal Revenue Code § 62(a) to permit taxpayers to subtract attorney's fees from gross income in arriving at adjusted gross income.
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The Lifetime Learning Credit, provided by 26 U.S.C. § 25A(b), is available to taxpayers in the United States who have incurred education expenses. For this credit to be claimed by a taxpayer, the student must attend school on at least a part-time basis. The credit can be claimed for education expenses incurred by the taxpayer, the taxpayer's spouse, or the taxpayer's dependent.