In addition to long-term capital gains, these preferential tax rates also apply to qualified dividends. This refers to most stock dividends, and a minimum holding period applies. You can read a thorough discussion of qualified dividends if you have significant dividend income and want to know if it meets the definition.
To sum up this section, the U.S. tax code is designed to encourage long-term investment. If you sell an asset for a profit after holding it for over a year or if you are paid a dividend from a stock you owned for a certain length of time, that portion of your income is taxable at lower rates.
Net investment income tax
In addition to all of the marginal tax brackets and capital gains tax rates discussed so far, certain high-income individuals are required to pay an additional 3.8% tax on their investment income. Appropriately known as the net investment income tax, this tax was implemented as part of the Affordable Care Act and can be assessed on certain types of investment-related income, such as capital gains, interest income, dividends, rental income, and more.
So, who has to pay the net investment income tax? Simply put, the tax applies to households with investment income in excess of $200,000 in total income for single tax filers and $250,000 for joint filers.
Here's how this works. Let's say that you're single and have $160,000 in income from your job. You also sold a stock position for a $50,000 capital gain. This is a total of $210,000. So, the portion of your investment income that caused you to exceed the $200,000 limit is $10,000, which would be subject to the additional tax.
2021 Social Security taxes
There are no Social Security tax "brackets." Instead, there's a flat rate that applies to all earned income up to a certain limit. (Note: Earned income generally means wages from a job or self-employment income.)
The Social Security tax rate is 6.2% each for employers and their employees, up to a maximum of $142,800 in earned income for 2021. In other words, if you earn $150,000 in 2021, you'll pay a 6.2% Social Security tax on the first $142,800 and nothing on the additional $7,200.
If you're self-employed, you are required to pay both sides of the Social Security tax. Combined with the Medicare tax, which we'll discuss in the next section, this is known as the self-employment tax.
2021 Medicare taxes
Like the Social Security tax, there is no Medicare tax bracket, just a flat rate. It's also worth noting that the Social Security and Medicare taxes are collectively referred to as FICA (Federal Insurance Contributions Act) taxes.
The Medicare tax rate is significantly lower than the Social Security rate at just 1.45% of earned income. However, unlike Social Security tax, there is no income limit -- the 1.45% rate applies to all earned income, even if it's in the millions. In addition, there is an additional Medicare tax of 0.9% that applies to earned income over certain thresholds, such as $250,000 for married couples filing jointly.
The QBI (pass-through) deduction for small business income
Although it's technically not a tax "bracket," the new qualified business income (QBI) deduction is worth mentioning. Also known as the pass-through tax deduction, this allows taxpayers to deduct as much as 20% of their income that comes from pass-through businesses, such as a sole proprietorship, partnership, LLC, or S-Corp.
In other words, if you're a freelancer with taxable income of $100,000, the QBI deduction can reduce your taxable income to $80,000. This has the effect of reducing your marginal tax bracket by up to 20%.
Don't forget about state and local taxes
It's important to mention that the tax brackets and various other tax rates discussed in this article are referring to federal taxes. Depending on where you live, your state and local governments may have their own state income taxes (and in some cases, local income taxes), along with a completely different set of tax brackets that are applied to your income.
How could this change in the future?
For one thing, it's important to realize that the U.S. tax brackets change every year. The IRS adjusts the income ranges in the tax brackets upward to keep up with inflation. The same can be said for capital gains tax brackets and the maximum Social Security taxable income.
However, there could be significant tax bracket changes on the horizon. As the Tax Cuts and Jobs Act exists in its current form, the marginal tax rates are set to revert back to their pre-2018 levels after 2025. And with the Biden administration planning to push for certain tax hikes on high earners, there could be changes within the next year or two.
The bottom line is that these are the tax brackets in the United States for the 2021 tax year, but there's no way to know for sure what they'll be in 2022 and beyond.