The IRS Announces 2024: The Internal Revenue Service (IRS) has just released the updated income tax brackets for 2024, enabling individuals to make preparations in advance for their 2025 tax returns as the year 2023 draws to a close.
Annually, the IRS modifies the ranges of the seven income tax brackets to accommodate inflation. In addition, they increased the standard deduction and made additional changes in accordance with Congress-enacted legislation.
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Modifications have been implemented to various aspects of retirement plans, including but not limited to the income tax brackets, dividend tax brackets, 401(k) and other contributions, Health Savings Account (HSA) limits, and Flexible Spending Account (FSA) maximums.
The New Brackets for Income Tax
A decrease of 5.4% in the income tax brackets was observed, which is more than the 7% increase that occurred last year but still above average.
In order to account for the impact of inflation, the IRS uses a formula derived from the consumer price index (CPI) to modify the tax brackets annually. Additionally, the modifications prevent individuals from being subjected to higher tax brackets and increased liability without a corresponding rise in purchasing power. This type of situation may arise when the rate of income growth is below that of inflation.
As a result of the Tax Cuts and Job Act, seven brackets were founded in 2017. Federal taxation in the United States is progressive, which means that a higher income is subject to a greater proportion of taxation. 10%, 12%, 22%, 24%, 32%, 35%, and 37% are the respective rates.
The brackets applicable to individual sole taxpayers are summarized below.
37% for earnings in excess of $609,350
35% for earnings in excess of $243,725
32% for individuals earning over $191,950
24% for individuals earning over $100,525
22% for earnings exceeding $47,150; 12% for earnings surpassing $11,600.
10% for incomes of $11,600 or less
Brackets for married couples filing jointly.
37% for incomes more than $731,200
35% for incomes more than $487,450
32% for incomes more than $383,900
24% for incomes more than $201,050
22% for incomes more than $94,300
12% for incomes more than $23,200
10% for incomes of $23,200 or less
Marginal Tax Rate
A common myth about the tax brackets is the entire income is subject to the highest tax bracket, but that’s incorrect. Each tax rate is applied to income within a specific bracket.
For example, if a single person earns $50,000 annually, the first $11,600 is taxed at 10%. After that, the 12% rate is valid until $47,150. The remainder of the salary is taxed at 22%. As a result, the effective or marginal tax rate is lower.
Ross Dugas, Ph.D., of Scientific Financial, says, “It is important to note that the marginal tax rate isn’t applied to your entire income, only the portion within that bracket. An understanding of marginal tax rates will help you reduce lifetime taxes and understand when pre-tax and post-tax investments are more efficient.”
Dividend Tax Brackets Change
Because the income tax brackets indexed higher, dividend tax brackets climbed, too. However, unlike income tax rates, only three rates exist for qualified dividends: 0%, 15%, and 20%. Most taxpayers will pay 0% or 15%. The rates for unqualified dividends are the same as ordinary income.
The brackets applicable to individual sole taxpayers are summarized below.
0% for incomes up to $47,025
15% for incomes more than $47,025
20% for incomes more than $518,900
Brackets for married couples filing jointly.
0% for incomes up to $94,050
15% for incomes more than $94,050
20% for incomes more than $583,750
Standard Deduction Was Raised
In addition, for married couples filing jointly, the standard deduction was increased by 5.4% to $29,200, making it more attractive than itemizing for many people. The amount is $1,500 higher than in 2023. But individual single taxpayers only receive a $14,500 deduction, $750 more than this year.
Ross Blount, CFP, CRPC of Springbok Wealth Partners, told Dividend Power, “The standard deduction is generally better for most people than itemizing deductions. This is because the standard deduction is higher than the itemized deductions for most taxpayers. However, if you have a lot of deductible expenses, it may be better to itemize your deductions.”
Retirement Plan Contribution Limits Are Higher
The IRS usually raises retirement plan contribution limits each year, too. For 2024, 401(k) participants can contribute no more than $23,000, up by $500 for 2023. Similarly, most 403(b) and 457 plans are capped at $23,000. Additionally, annual contributions to an Individual Retirement Account (IRA) are now $7,000 in 2024, more than the $6,500 this year.
Pre-tax contributions to a regular 401(k) are a method to lower current taxes because they are tax-deferred until withdrawals are made. A Roth 401(k)’s contributions are made with after-tax dollars, and the gains grow tax-free. The differences between the two should be researched and discussed with a financial advisor before making decisions.
Likewise, a traditional IRA is built up with pre-tax money compared to a Roth IRA. Whether a Roth or Traditional IRA is better depends on a person’s financial situation, and it is often best to consult a financial professional.
Higher HSA and FSA maximums
The HSA and FSA programs help Americans manage and pay for health care expenses. In 2024, the maximum amount for both was incrementally indexed higher.
An HSA is beneficial for workers with high-deductible healthcare plans. To take advantage of an HSA, the individual deductible must be at least $2,800, which is an increase of $150 from 2023, but less than $4,150, up $200. At the same time, the family deductible must be between $5,550 and $8,350, higher by $200 and $450, respectively.
Workers contribute to an FSA by deducting pre-tax dollars from their paychecks. The limit rose $150 to $3,200 in 2024.
The New Tax Brackets and the Bottom Line
The annual inflation adjustment keeps taxpayers from losing buying power by increasing income tax brackets and other categories. A sizable increase of 7% occurred over the previous two years, then 5.4%. Besides the above, there are changes to the Earned Income Tax Credit, Alternative Minimum Tax, estate tax exemption, Child Tax Credit, and gift tax exclusion. Taxpayers should check the IRS announcement for all the details.
