New Income Tax Brackets and Rates for 2024

Background

Federal income brackets cause much confusion, and change every year, even if there aren't any new tax laws.  The Federal Income Tax Code is thousands of pages long, and the brackets are just a part of that federal income tax system.  Let's discuss the portion of income subject to the tax percent rates, as they have been adjusted for inflation for 2024.

Tax Bracket Changes in 2024

In 2024, taxpayers can expect to see changes to the tax brackets as a result of annual adjustments for inflation. The Internal Revenue Service (IRS) typically updates the tax brackets each year to account for changes in the cost of living. These adjustments are designed to ensure that taxpayers are not pushed into higher tax brackets simply because of inflation.

The tax brackets are used to determine the amount of income that is subject to different tax rates. As inflation increases the overall level of income, it also impacts the threshold for each tax bracket. This means that taxpayers may see a change in the amount of income that is subject to each tax rate.

These adjustments can have different impacts depending on an individual's income level. For some taxpayers, the changes may result in a lower tax burden, as they may find themselves in a lower tax bracket as a result of the adjustments. On the other hand, higher-income earners may find themselves in a higher tax bracket due to the inflation adjustments.

It's important for taxpayers to be aware of these changes and to plan accordingly. For those who may find themselves in a higher tax bracket, it may be beneficial to explore tax planning strategies to help minimize the impact of the higher tax rates. This could include maximizing deductions, deferring revenue, contributing to retirement accounts, or utilizing other tax-advantaged investment strategies.

Overall, the changes to the tax brackets in 2024 are a reminder of the importance of staying informed about tax regulations and being proactive in managing one's tax liability. By staying informed and working with a tax professional, taxpayers can ensure that they are making the most of the available tax laws and minimizing their tax burden.

Federal Tax Brackets

The federal government income tax system in the United States is based on a progressive tax structure, which means that the marginal tax rate increases as an individual's income increases. This is achieved through a series of tax brackets, which determine the percentage of income that is owed in taxes based on a taxpayer's income level.  This also means that the effective tax rate that taxpayers pay will likely be different than one of the federal income tax rates below.

The federal income tax brackets are updated annually to account for inflation and changes in the cost of living. For the 2021 tax year, there are seven tax brackets, with tax rates ranging from the lowest rate of 10% to 37%. Each tax bracket applies to a specific range of income, and the federal tax rate for that bracket applies to the income within that range.

Here are the marginal tax brackets for the 2024 tax year for single filers:

- 10%: Up to $11,600

- 12%: $11,600 to $47,150

- 22%: $47,151 to $100,525

- 24%: $100,526 to $191,950

- 32%: $191,951 to $243,725

- 35%: $243,726 to $609,350

- 37%: Over $609,350

For married couples filing jointly, the tax brackets are as follows:

- 10%: Up to $23,200

- 12%: $23,201 to $94,300

- 22%: $94,300 to $201,050

- 24%: $201,050 to $383,900

- 32%: $383,900 to $487,450

- 35%: $487,451 to $731,200

- 37%: Over $628,300

It's important to note that these tax brackets apply to taxable income, which is the income that is left after deductions, standard or itemized. 

Standard Deduction Amounts

The standard deduction is a set amount of money that taxpayers can subtract from their taxable income. This income exclusion is a key factor in determining how much tax a person owes, and it can greatly reduce the amount of money that needs to be paid to the government.

For the tax year 2024, the standard deduction amounts are as follows:

- Single or married filing separately: $14,600

- Married filing jointly or qualifying widow(er): $29,200

- Head of household: $21,900

These standard deduction amounts are higher for individuals who are blind. The additional standard deduction for those who are 65 or older or blind is $1,700 for single or head of household filers, and $1,350 for married filers.

The standard deduction is a benefit for many taxpayers, as it allows them to reduce their taxable income without having to itemize their deductions. This can be particularly helpful for those who may not have enough expenses to itemize, or for those who prefer not to go through the hassle of keeping track of every expense.

For those who do choose to itemize their deductions, it is important to compare the total of their itemized deductions to the standard deduction amount to see which option would give them the greatest tax benefit.

It is important for taxpayers to be aware of the standard deduction amounts and how they can impact their tax liability. By taking advantage of the standard deduction, individuals and families can potentially save a significant amount of money on their taxes.

Exemptions 

Since the Tax Cuts and Jobs Act (TCJA) passed 2017, taxpayers only are allowed a tax deduction.  There are no longer exemptions for individuals and dependents.  Prior to the TCJA taxpayers were allowed an individual exemption from income for themselves, their spouse, and qualifying dependents.

Itemized Deductions

Itemized deductions are specific expenses that taxpayers can subtract from their adjusted gross income to lower their taxable income. It the total amount of your itemized deductions exceed your standard deduction amount, you can take the larger amount.  These deductions are reported on Schedule A of the IRS Form 1040 and can include a wide range of expenses such as medical and dental expenses, state and local taxes, mortgage interest, charitable contributions, and certain miscellaneous expenses.

One of the advantages of itemizing deductions is that it allows taxpayers to potentially lower their tax bill by claiming a larger amount of deductions than they would get with the standard deduction. However, not everyone will benefit from itemizing deductions. For some taxpayers, their total itemized deductions may not exceed the standard deduction amount, making it more beneficial to take the standard deduction instead.

When deciding whether to itemize deductions, it's important to carefully consider all eligible expenses and compare them to the standard deduction amount for the tax year. Taxpayers should also be aware of the limitations and rules for each type of deduction, as well as any changes in tax laws that may affect their eligibility.

It's worth noting that in some cases, certain itemized deductions may be subject to limitations based on a taxpayer's adjusted gross income. For example, the deduction for medical and dental expenses is limited to expenses that exceed 7.5% of the taxpayer's adjusted gross income for the tax year.

Overall, itemized deductions can be a valuable way for taxpayers to lower their tax liability, but it requires careful record-keeping and an understanding of the tax rules and regulations. Consulting with a tax professional can also be beneficial for those who are uncertain about whether to take the standard deduction or itemize their deductions. By carefully considering their options, taxpayers can make the most of the available deductions and maximize their tax savings.

Inflation Adjustments to Tax Rates and Brackets

Inflation adjustments to tax rates and brackets are a key aspect of maintaining fairness in the tax system. As the cost of living increases over time, it is important that tax rates and brackets are adjusted to reflect these changes. This ensures that individuals are not pushed into higher tax brackets simply due to inflation, and that the real value of tax exemptions and deductions remains constant.

In the United States, the Internal Revenue Service (IRS) adjusts tax rates and brackets annually to account for inflation. These annual inflation adjustments are done using the consumer price index (CPI), which measures changes in the cost of living over time. By making these adjustments, the IRS aims to prevent bracket creep, which occurs when inflation pushes individuals into higher tax brackets even though their real income has not actually increased.

Inflation adjustments to tax rates and brackets help to maintain the progressivity of the tax system. Progressive taxation means that as income increases, the percentage of that income paid in taxes also increases. Without inflation adjustments, individuals could find themselves paying a higher percentage of their income in taxes simply because of inflation, rather than actual increases in real income thresholds.

Additionally, inflation adjustments help to ensure that the nominal value of tax credits, deductions, and exemptions remains consistent with the actual cost of living. This prevents these benefits from eroding over time, and helps to ensure that individuals are not unfairly burdened by their tax obligations.

In conclusion, inflation adjustments to tax rates and brackets are a crucial component of a fair and equitable tax system. By accounting for changes in the cost of living, these adjustments help to prevent bracket creep, maintain the progressivity of the tax system, and ensure that the real value of tax benefits remains constant. This ultimately helps to promote fairness and stability in the tax system for individuals and businesses alike.

Single Filers

Single taxpayers who file their taxes as single, are a large and diverse group in the United States. According to the IRS, over 55 million tax returns were filed as single in 2020, making up a significant portion of the overall tax-paying population.

Single filers can include young adults just starting their careers, individuals who have chosen to remain unmarried, divorcees, and widows or widowers. Each of these groups may have different financial situations and tax considerations, making it important for single filers to understand their unique tax status and obligations.

For single individuals, it is crucial to take advantage of the various tax credits and deductions available to them. This may include claiming the standard deduction or itemizing deductions if it makes financial sense to do so. Additionally, single filers may be eligible for tax credits such as the Earned Income Tax Credit, which can provide valuable assistance in reducing their tax liability.

Single filers should also be aware of potential tax implications related to investments, retirement savings, and healthcare expenses. For example, contributing to an Individual Retirement Account (IRA) or Health Savings Account (HSA) can have a positive impact on a single filer's tax situation, while capital gains from investments may result in additional tax obligations.

Furthermore, single filers should carefully consider their filing status and potential benefits of filing as Head of Household if they have dependents or meet certain criteria. This filing status may result in a lower tax rate and a higher standard deduction, ultimately reducing their tax burden.

In conclusion, single filers play a significant role in the U.S. tax system and should be proactive in understanding their tax obligations and opportunities for savings. By staying informed and taking advantage of available credits and deductions, single filers can optimize their tax situation and ensure they are fulfilling their financial responsibilities while also maximizing their benefits.

Joint Filers

Joint filers are married individuals who choose to file their taxes together as a married couple. This option is available to couples who are legally married and wish to combine their incomes, deductions, and credits on a single tax return. To be considered married for tax purposes the couple must be married as of the end of the tax year, for most people on a cash basis, that's December 31st.

Married couples can either file joint returns or separate, married filing separately.  Usually married filing jointly is preferable, but you will need to consider your individual situation and compare the alternatives.  Generally speaking, for most people, being married results in a higher combined tax bill than two individuals filing as individuals.  Of course, you don't have that option if you are married, but it could be something to think about if you are considering marriage.

One of the main benefits of filing jointly is the potential for a lower tax rate. When combining their incomes, couples may be able to take advantage of certain tax breaks and deductions that they wouldn't have access to if they filed separately. Additionally, joint filers may qualify for a higher standard deduction, which can further reduce their tax burden.

Another advantage of filing jointly is the ability to claim certain tax credits that are only available to married couples filing jointly. These credits, such as the Child and Dependent Care Credit and the Earned Income Tax Credit, can provide significant financial benefits to couples with children or lower incomes.

However, there are also some potential drawbacks to consider when married taxpayers file jointly. One of the most significant concerns for joint filers is the issue of joint and several liability. This means that both individuals are responsible for the accuracy and completeness of the tax return, as well as any tax liabilities that may arise. In the event of an audit or tax dispute, both individuals could be held accountable for any errors or omissions on the return.  If you file separately, you are only responsible for the tax on your tax return, not your spouses.

It's also important to consider the financial implications of filing jointly, especially if one spouse has significant debts or financial obligations. In some cases, filing separately may be a more advantageous option for couples in this situation.

Ultimately, the decision to file jointly or separately depends on the specific financial circumstances of each couple. It's important to carefully consider the potential benefits and drawbacks of each option before making a decision. Consulting with a tax professional can provide valuable insight and guidance to help couples make the best choice for their individual situation.

Conclusion

Although the federal tax code is confusing, you have a trusted guide with Core.  Email us your question at info@coregroupus.com and we will be happy to assist.