The IRS issues new tax deductions, credits, and changes regularly. Inflation adjustments are a regular change that can affect your tax returns. For the tax year 2020, you probably would have filed the tax returns already. The IRS has issued inflation-adjusted tax credits and deductions for the tax year 2021.

These changes will impact the tax returns that you’ll file in 2022. Some of the important changes will be around the CARES act exemptions that will expire this year.

Let us take you through the tax brackets and see how they work.

Tax Brackets for the Tax Year 2021

The tax year 2021 starts from January 1, 2021 and ends on December 31, 2021. You’ll file these taxes in 2022 with a normal tax deadline of April 15, 2022.

Under the Tax Cuts and Jobs Act (TCJA), there are no exemptions for personal tax filers. For the tax year 2021, the exemption remains zero too.

There are seven tax brackets for tax filers in the US. These tax brackets work on an incremental/progressive basis. It means as your net income grows, your tax bracket will be higher.

Note: Some individuals may have to pay taxes on the Alternative Minimum Taxable (AMT) basis. The AMT rates are currently 26% and 28%. The AMT uses an alternative definition of taxable income to stop tax avoidance by the rich taxpayers. It can also help the lower-income taxpayers to avoid double taxation.

The exemptions for AMT are given in the table below.

Inflation Adjustments for Tax Year 2021 – Filed in 2022

The IRS adjusts the taxable income, exemptions, deductions, and credits for taxpayers annually for inflation. For instance, the taxable income with the first slab of 10% for individuals in the year 202 was $9,850. It has been adjusted for inflation and is set at $ 9,875. Similarly, all other tax brackets are adjusted for inflation.

The tax rates for all seven slabs remain the same as 10%, 12%, 20%, 22%, 24%, 32%, and 37%.

Inflation adjustments for tax exemptions and credits can lower the tax bill. However, the net effect on the tax liability for the taxpayers would depend on the income and expense adjustments for inflation.

Progressive Structure of Tax Brackets

Income tax authorities can impose a simple flat tax structure, a regressive, or a progressive structure for tax collections. The US tax authorities impose a progressive tax structure on taxpayers. It means your tax liability will increase as your income increases.

A progressive tax structure means the tax rate will increase with increased income. For example, if you are earning $ 600,000 annually as an individual, you’ll get through each tax bracket. Similarly, someone earning around $ 12,000 annually would go through only the first two tax brackets.

For simplicity, taxpayers can calculate an average tax rate rather than calculating marginal rates. Effectively, all taxpayers can calculate the average tax rates by dividing all taxable income by the tax payable amount. It can give you an idea of your total tax liability as well as the net tax rate that the Federal government imposes on your taxable annual income.

How Do Tax Brackets Work? With Examples

Let us understand the progressive tax bracket structure with the help of examples. As we have seen above, the tax rate gets higher as the taxable income increases.

Example # 1:

Suppose as an individual your annual taxable income is $ 35,000. It means you fall under the tax bracket of 12%. You do not pay a flat tax rate; hence you will not pay a direct 12% of $35,000. ($ 4,200).

You pay 10% on the first $ 9,875. It comes to $987.50.

For the next $25,125, you’ll pay 12%. It comes to $ 3,015.

Hence your total Tax Liability will be $ 4,002.50.

Example # 2:

Suppose your annual taxable income for a married joint filing is $150,000. It puts you in the third tax bracket of 22%. With a flat tax rate, you would’ve paid 22% of $150,000 is $ 33,000.

Your first $ 19,900 will be taxed at 10%. It equals $ 1,990.

The next $ 61,1150 ($ 81,050 – $ 19,900) will be taxed at 12%. It equals $ 7,338.

The third $ 68,950 ($ 150,000 – $81,050) will be taxed at 22%. It equals $ 15,169.

Hence, your total Tax Liability will be $ 24,497. The average tax rate becomes 16.33%.

As we can see in both examples, the taxpayer would have paid higher taxes under a flat tax rate structure. Although the US imposes an incremental tax structure, it does not necessarily mean higher taxes.

On the other hand, some experts argue that a flat tax rate structure would mean lower tax rates. That could lower the tax liability for many taxpayers ending up in higher tax brackets. However, it could potentially put lower-income taxpayers at a disadvantage of paying higher net taxes with a flat tax rate.

Capital Gains Taxes

Taxpayers’ income from the long-term capital gains is taxed at a different tax rate. There are two tax brackets for capital gains taxes, first for 15% and the second for a 20% tax bracket.

For individuals, the capital tax gains of $40,400 will be taxed at 15% and 0% below it.

For Married-Joint filers, the capital tax gains of $80,800 will be taxed at 15%.

For the head of household, the capital tax gains of $ 54,100 will be taxed at 15%.

Capital gains below these amounts will be charged at 0%. Capital gains above these limits will be taxed at 20% rates. A similar progressive tax structure calculation rule applies here too.

Standard Deductions

Standard deductions can lower your tax liability. These deductions can help you lower a tax bracket as well. It means if you are in a tax bracket of 24%, a standard deduction of $1,000 that pushes you to a 22% tax bracket can save you $240 in the tax liability.

Standard Deductions for:

• Individuals = $ 12,550.
• Married Filing jointly = $ 25,100.
• Married filing separately = $ 12,550.
• Head of household = $ 18,800.

The standard deduction amount for a dependent person cannot exceed $ 1,100 or a sum of $350 and the individual earned income credit (but should not exceed the regular standard deduction amount).

How to Lower your Tax Brackets – Credits and Deductions

You can reduce the tax liability by using either tax credits or deductions. As we have seen above, deductions can lower your tax bracket. Tax credits can lower your net tax liability.

Let us discuss a few key tools to fully utilize the progressive tax brackets and lower your tax liability.

Earned Income Tax Credit – EIC

The EIC amount for the year 2021 has also been adjusted for inflation. It will be $ 6,728 for married taxpayers filing jointly with three or more children. For married couples, the phase-out amount begins at $ 25,470 and ends at $ 57,414.

For the tax year only, the tax credit for earned income tax credit for a childless couple increases to $ 1,502. The special increase is due to the American Rescue Plan signed by the Biden Administration.

Child Care Tax Credit

The age limit for child care tax credit has been increased from 16 to 17 years. The tax credit amount has also been increased to $ 3,000 per child. For children under 5, the tax credit will be $ 3,600.

The IRS uses Modified Adjustable Gross Income (MAGI) formula to check eligibility of child care tax credit. For qualifying taxpayers, the number of MAGI will be:

• Single – $ 75,000.
• Married filing jointly – $ 150,000
• Head of Household – $ 112,500.

The tax credit for Qualified Adoption and Child with Special needs will be $ 14,400 for the tax year 2021.

Retirement Plan Contributions

The special rules for retirement plans and contributions with increased waivers will end after the tax year 2020 unless enacted again by law. Taxpayers should keep in mind the normal retirement plan contribution limits and other contributions such as medical savings accounts.

The income exclusion limit for SIMPLE retirement accounts is set at $ 13,300. For retirement plans such as 401 (k), 403 (b), and 457, the exclusion amount is set at $ 19,900. The catch-up amount for individuals aged 50 or above is set at $ 6,500.

For Medical Savings Accounts with self-only coverage, the annual plan deductible amount should not be less than $ 2,400 and no more than $ 3,600.

Additionally, taxpayers can think of conventional itemized deductions and above-the-line-item deductions to lower the tax brackets and net tax liability.

For example,

• Medical and Dental Expenses
• Home mortgage interest
• Student loan interest
• Charitable donations
• Gifts
• Foreign earned income exclusion.

References for Research Work:

• IRS provides tax inflation adjustments for tax year 2021 | Internal Revenue Service
• Credits & Deductions for Individuals | Internal Revenue Service (irs.gov)

The information provided is for educational purposes only and is not intended as investment advice for anyone. All information discussed is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The views presented today are those of WealthCare Financial and do not necessarily represent the views of AlphaStar Capital Management, LLC. The opinions expressed are subject to change without notice and do not constitute financial, legal or tax advice. Please consult your financial professional before executing any financial strategy.  Investment Advisory and financial planning services are offered through AlphaStar Capital Management, LLC, an SEC registered investment adviser. AlphaStar and WealthCare Financial are independent entities.

We have all done impulsive buying, whether we have noticed the phenomenon or not. Impulse purchasing or buying happens when we shop for unplanned items. It happens at the spur of the moment.

Experts say various factors contribute towards our impulsive buying behavior. From psychological factors to marketing tricks, and from buying habits to scarcity, several factors play important role in shaping our impulsive buying behaviors.

All impulsive buying isn’t bad either. Sometimes we can make quick decisions to get items at bargain prices. However, more often we tend to regret our impulsive purchases later on.

We can work on our impulsive buying habits to keep things under control. It takes consistent effort and time to change buying behaviors.

Let us guide you on the impulsive buying behavior, common examples, and how to avoid these costly mistakes.

What is Impulsive Buying?

We can simply define impulsive buying is any purchase that isn’t pre-planned. It happens at the spur of the moment. When a buyer buys items that weren’t on the shopping list initially, it is called an impulse purchase.

Impulsive buying can be for regular and small priced items like groceries or as expensive as cars. The bigger the buying power, the pricier the impulse purchase. In that sense, it relates to everyone without depending on the income level of the buyers.

Impulsive buying is also a common phenomenon. In fact, a recent study shows, Americans are spending more on impulsive buying than earlier. It happens due to several factors. Most prominent being our psychological effect on our buying behaviors. We often enter a shopping mall for “window shopping” and end up buying several items that we never intended to earlier.

Let’s be honest with ourselves, we have all fallen prey to this trick used by marketers. Recall buying a “buy one get one” free promotion. Perhaps, you would’ve bought something for seasonal promotion or discount. Else, you would’ve bought something only because you could afford it. It gives us pleasure to make impulse purchases.

Impulse buying behaviors is commonly observed among all classes of society. It is also a common phenomenon in both genders. Both men and women do equally participation in impulse purchases.

Why do We Shop Impulsive?

So, if everyone is found guilty of impulsive buying irrespective of gender or buying power, then why do we do it?

The foremost reason we can think of is the buying habits. Marketers do trick customers too. They showcase items in a way that we feel like buying them anyway. Whether we do the impulse buying for the items we need or not is something debatable too.

Here are a few commonly observed factors that trigger our impulsive purchases.

Psychological Factors

Psychological factors include our emotions, sense of pleasure, sense of fear, or falling victim of habits. Often, we take pride in spending personal finances with such impulse purchases as don’t think money spent this way is money lost.

Enjoyment

Many people make impulse purchases to seek fun. It can be for little priced items like a cup of coffee or for a sports car. We seek pleasure with certain items such as buying a latest version of smartphone.

Buying Power

Like it or not, when we have money in our wallets, we tend to spend more money than normal. Buyers with significant buying power tend to fall prey to impulsive purchases. It doesn’t depend on the dollar figure with buying power, it remains another psychological factor.

Addiction of Habits

Habits once formed are difficult to change. Buying habits are even harder to resist. We all do shop for our favorite brands even if they come at higher prices. Similarly, we keep doing the impulse purchases without realizing it has formed into habits.

Promotions and Marketing

Sale discounts, promotions, and marketing ads trigger our impulsive buying heavily. We never notice the presentation of certain items and flooring plans. Marketers plan them well. We see certain products in the most sold items sections that don’t make sense, well they do now.

Common Examples of Impulsive Buying

There are several reasons for impulse purchases. It means there can be limitless examples of impulsive buying as well. However, we can observe around ourselves for some commonly purchased items as impulse purchases.

Here are a few common categories for impulse purchases.

Clothing and Apparel

Discounts and the latest fashion series are the biggest red flags for impulsive buyers in clothing section. Clothing and apparel sections see the most significant impulse purchases. The biggest reason being the trend following and seasonal sales.

Groceries

Food items and groceries are the most tempting items anyway. It’s hard to resist the temptation when food items or groceries are offered in bundles and discounts. These are the widely sold items to impulse buyers, that often set you out of budgets.

Fast Food

We can all brew our cup of coffee or make a sandwich at home, but we often tempt to buy through our favorite fast-food chain. That’s exactly what impulsive buying is. Fast food items get heavier on our budgets as well as our health. Yet these are prominent impulse purchases everywhere.

Home Decor

Home decor items are bought for pleasure and satisfaction than needs. These are our wants that we wish to fulfill every now and then. Decoration items such as paintings, rugs, expensive clocks, and vases are all common examples of impulse purchases.

Tech Gadgets

Tech gadgets have a tendency of upgradation and continuation. We can’t keep up with the pace of tech development. Yet we see many people falling prey to following the latest tech gadgets at higher prices.

All tech gadgets lose the price tag after a while. It’s easier to avoid these expensive impulsive purchases if you can control the temptation.

Software and Apps

It is another modern phenomenon when it comes to impulse purchases. Like updating our tech gadgets, we tend to upgrade the latest versions of software and applications as well. Although some purchases in software category are inevitable.

Online Subscriptions

Have you ever noticed you have been paying for online newspaper, magazine, or journal subscriptions that you haven’t used for a long time?

Many people intend to subscribe to such online services for a fraction of price. However, these subscriptions accumulate significantly in the long run.

Impulsive Buying for Expensive Items

Impulsive purchases do not happen for necessities always. Consumers with bigger buying powers can develop this habit for expensive items as well. For example, a large chunk of fashion jewelry is sold as impulse buying.

Similarly, well-off people find attraction in buying expensive gadgets such as luxury cars, sports vehicles, boats, apartments, and land. Many of these purchases happen spontaneously.

The fundamental definition of impulsive purchasing in unplanned buying. It does not relate to the income level of the consumer. People with luxurious lifestyle tend to buy spontaneously more often though.

How to Avoid Impulsive Buying?

Impulsive buying is habitual, it is concerned more with habits than financials. These habits can prove expensive in the long run. We can all work to develop our habits differently.

Here are a few tips to control impulsive buying.

Plan your Shopping

If you plan for shopping, you’ll reduce chances of spontaneous purchases. Impulsive buying is all unplanned shopping. As we said, it is more of a habit than necessity. It will take you time to ratify the habits.

Consistently push yourself to do planned shopping every time. It will help you resist the impulsive purchases.

Make a Budget – and Stick to it

Budgets are financial organizers. You can spend on anything without creating budgets. Create budgets for achieving your financial goals. Budgets will help you control the impulsive purchases significantly. Importantly, you must stick to budgets.

Unsubscribe to Promotional Emails

Promotional emails are an effective tool for marketers. Emails still have the highest conversion rates in the marketing tools. It’s easier to click on the promotional links and buy items you never planned.

Unsubscribe to such marketing emails for the latest gadgets, apps, software, or even fashion brands.

Resist the Temptation of buying on Discounts

Discounts and promotions are set to lure in the customers. Like it or not, we all fell prey to the marketing tactics. It’s hard to change these habits in a day, but we can all mend our habits a bit.

Keep your shopping organized with budgets and pre-planning. It will help you to resist the promotions for unwanted items.

Stop Chasing Tech Gadgets

One of the most common reasons of the modern-day buying behaviors is to follow the trends. Tech gadgets are a prime example of following the trends these days. If you can build the habit of finding utility in tech gadgets rather than luxury, you’ll break the habit of impulsive purchasing.

Follow the Financial Goals

Following the financial goals is harder than setting ones. Keep your financial objectives in mind whenever you go for shopping. It will help you stay focused and avoid the costly impulsive purchases.

Impulsive buying is more of a habit than necessity. It follows our emotions and old habits. For many of us, it can be the reason to our failures of financial independence. We can avoid the costly mistakes of impulsive buying with proper planning and devotion.

The information provided is for educational purposes only and is not intended as investment advice for anyone. All information discussed is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The views presented today are those of WealthCare Financial and do not necessarily represent the views of AlphaStar Capital Management, LLC. The opinions expressed are subject to change without notice and do not constitute financial, legal or tax advice. Please consult your financial professional before executing any financial strategy.  Investment Advisory and financial planning services are offered through AlphaStar Capital Management, LLC, an SEC registered investment adviser. AlphaStar and WealthCare Financial are independent entities

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