IRS announces tax brackets for 2024
by Prakash Kolli | Wealth of Geeks via AP
Sunday, November 26, 2023
FILE – Tax Refund Verification with W2 and 1040 US Income Tax Return Forms (Getty Creative Images)
We’re nearing the end of 2023 and the Internal Revenue Service (IRS) just announced the new 2024 income tax brackets so people can plan ahead for their 2025 tax returns.
The IRS updates the seven income tax brackets annually and changes their ranges to account for inflation. They also increased the standard deduction and made other changes based on laws passed by Congress.
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In addition to income tax brackets, dividend tax brackets, 401(k) and other retirement savings contributions, Health Savings Account (HSA) limits, Flexible Spending Account (FSA) limits, and other items have also changed.
The new income tax brackets
Income tax brackets were increased by 5.4%, less than last year’s increase of 7% but still more than usual.
The IRS changes the brackets annually using a formula based on the Consumer Price Index (CPI) to account for the effects of inflation. The changes also prevent taxpayers from moving into a higher tax bracket and being taxed more heavily without any actual increase in purchasing power. Such a scenario can occur if incomes rise less quickly than inflation.
In 2017, the Tax Cuts and Jobs Act established seven tax brackets. In America, federal taxation is progressive, meaning that higher income leads to a higher share of taxes. The rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
The tax brackets for individual taxpayers are summarized below.
- 37% for income over $609,350
- 35% for income over $243,725
- 32% for income over $191,950
- 24% for income over $100,525
- 22% for income over $47,150
- 12% for income over $11,600
- 10% for income of $11,600 or less
Brackets for married couples filing jointly.
- 37% for income over $731,200
- 35% for income over $487,450
- 32% for income over $383,900
- 24% for income over $201,050
- 22% for income over $94,300
- 12% for income over $23,200
- 10% for income of $23,200 or less
A common myth about tax brackets is that all income is subject to the highest tax bracket, but this is incorrect. Each tax rate is applied to income within a specific tax bracket.
For example, if a single person earns $50,000 per year, the first $11,600 is taxed at 10%. After that, the 12% rate applies up to $47,150. The rest of the salary is taxed at 22%. As a result, the effective or marginal tax rate is lower.
Ross Dugas, Ph.D. from Scientific Financial, says: “It is important to note that the marginal tax rate is not applied to all of your income, but only to the portion within that range. Understanding marginal tax rates will help you reduce lifetime taxes and understand when pre-tax and after-tax investing is more efficient.”
Dividend tax brackets are also changing
As income tax brackets were indexed higher, dividend tax brackets also increased. However, unlike income tax rates, there are only three rates for qualified dividends: 0%, 15% and 20%. Most taxpayers pay 0% or 15%. The rates for unqualified dividends are the same as for ordinary income.
The tax brackets for individual taxpayers are summarized below.
- 0% for income up to $47,025
- 15% for income over $47,025
- 20% for income over $518,900
Brackets for married couples filing jointly.
- 0% for income up to $94,050
- 15% for income over $94,050
- 20% for income over $583,750
The standard deduction has been increased
Additionally, the standard deduction for married couples filing jointly was increased by 5.4% to $29,200, making it more attractive to many people than filing individually. The amount is $1,500 higher than in 2023. However, single taxpayers only get 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 than itemized deductions for most people. This is because the standard deduction is higher than itemized deductions for most taxpayers. However, if you have a lot of deductible expenses, it may be better to itemize your deductions.”
Contribution limits for retirement plans are higher
The IRS also typically increases retirement plan contribution limits each year. For 2024, 401(k) participants cannot contribute more than $23,000, an increase of $500 for 2023. Likewise, most 403(b) and 457 plans are capped at $23,000. Additionally, annual contributions to an individual retirement account (IRA) in 2024 are now $7,000, up from $6,500 this year.
Pre-tax contributions to a regular 401(k) are a method of reducing current taxes because they are tax-deferred until withdrawals are made. Contributions to a Roth 401(k) are made with after-tax dollars and profits grow tax-free. The differences between the two should be researched and discussed with a financial advisor before making a decision.
Likewise, a traditional IRA is built with pre-tax money compared to a Roth IRA. Whether a Roth IRA or a 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 their health care expenses. In 2024, the maximum amount for both was gradually increased.
An HSA is beneficial for employees with high-deductible health plans. To benefit from an HSA, the individual deductible must be at least $2,800, an increase of $150 from 2023, but less than $4,150, an increase of $200. At the same time, the deductible for families must be between $5,550 and $8,350, higher by $200 and $450, respectively.
Employees contribute to an FSA by deducting pre-tax dollars from their paychecks. The limit increased by $150 to $3,200 in 2024.
The new tax brackets and the final result
The annual inflation adjustment prevents taxpayers from losing purchasing power by increasing income tax brackets and other categories. In the last two years there was a notable increase of 7%, followed by 5.4%. There are also changes to the earned income tax credit, the alternative minimum tax, the estate tax exemption, the child tax credit, and the gift tax exclusion. Taxpayers should review the IRS notice for full details.
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