2024 Tax Changes: How Inflation Could Impact Your Federal Income Taxes
In 2024, taxpayers may see changes to their federal income taxes due to inflation. The Internal Revenue Service (IRS) has adjusted the tax brackets upward to account for the high inflation rates, which could potentially result in lower tax bills for many individuals.
It’s important to understand the concept of taxable income. Taxable income refers to the amount of money left after applying any adjustments and deductions entitled to an individual. For instance, if you earn $100,000 in 2024 as a single taxpayer, have a $7,000 deduction for retirement contributions, and utilize the $14,600 standard deduction, your taxable income would be $78,400.
The tax brackets mentioned in the previous paragraph are marginal tax brackets. This means that they apply to specific ranges of taxable income. For example, if you have $78,400 of taxable income as a single individual, your tax would be calculated based on the tax brackets for single filers provided by the IRS.
In addition to adjustments in the tax brackets, the standard deduction is also increasing in 2024. For married couples, the standard deduction will rise to $29,200, which is a $1,500 increase compared to the previous year. Singles and heads of household will have a standard deduction of $14,600 and $21,900, respectively.
Many other significant tax items are also adjusted annually for inflation, such as the maximum earned income tax credit (EITC) and the Alternative Minimum Tax exemption, both of which are rising significantly as well.
If your income has remained relatively in line with inflation, you may expect minimal changes to your effective tax rate. However, the reality is that not everyone’s income has kept pace with inflation. If your income has not increased in line with inflation, you could potentially experience a decrease in your federal income taxes for 2024 due to the higher income ranges associated with each marginal tax rate.
Consider the following scenario: you are married and earned $100,000 in 2023. By claiming the 2023 standard deduction for married couples filing jointly ($27,700), your taxable income would be reduced to $72,300. Based on the 2023 tax brackets, you would owe $8,236 in federal tax for that year.
Now, let’s imagine you earn $100,000 again in 2024. Firstly, the higher 2024 standard deduction would bring your taxable income down to $70,800. Moreover, the generally more favorable tax brackets for 2024 would result in a tax of $8,032, saving you over $200 compared to 2023.
It is essential to note that these changes are specific to the 2024 tax year, meaning they will apply to the tax return filed in 2025.
While it is hoped that individuals’ incomes increase in line with inflation or even exceed it, these tax changes offer potential relief for those whose incomes are not keeping pace. The adjusted tax brackets and increased standard deduction provide an opportunity for taxpayers to benefit from lower federal income taxes in 2024.
It is always advisable to consult a tax professional or utilize tax software to ensure accurate and optimized tax filing. Stay informed and make the most of these changes in the upcoming tax year.
