2024 Tax Bracket Updates: Insights from a Financial Advisor
If your earnings haven't matched the inflation rate this year, there's a potential bright spot ahead: a tax cut might be on the horizon.
The IRS has rolled out revised tax brackets for 2024, elevating most marginal tax brackets by thousands of dollars. This adjustment could shield more of your income from taxes in the upcoming year.
The increase of 5.4% is lower than the surge of 7.1% in 2023. However, it is still one of the highest adjustments recently. Additionally, it is higher than the current inflation rate.
Moreover, the standard deduction is set to climb. For married couples, it will jump by $1,500 to reach $29,200, while single filers will see a $750 increase to $14,600.
These adjustments reflect inflation until October 2023. If your income didn't increase as much as the prices of gas and groceries, there is good news. You might have some extra money left after paying your taxes.
Why do brackets change?
In the United States, the tax system follows a progressive structure. As income increases, taxes also increase. This is determined by 7 different income levels, similar to steps on a staircase.
Annually, the IRS announces modifications to these brackets. These changes are related to inflation. They typically occur simultaneously with the government's adjustment of Social Security payments. The adjustments are based on the cost of living.
How 2024 tax brackets might affect you.
Consider an individual filer earning $100,000 in both 2023 and 2024, opting for the standard deduction in both years. The $420 saved is because of two reasons.
The first reason is a higher standard deduction. The second reason is a lower tax rate on the total income subject to taxation. With broader brackets, more of your taxable income gets taxed at a lower rate.
These adjustments impact everyone, but they hold particular significance for individuals whose income lagged behind inflation this year. US workers' average weekly earnings decreased by 0.1% from September 2022 to September 2023, says the Department of Labor.
How to help manage tax bracket changes.
There are two approaches to deductions on your federal income tax return: itemizing deductions or utilizing the standard deduction. The standard deduction is a fixed dollar amount determined by the IRS. Itemizing involves totaling all eligible deductions, potentially surpassing the standard deduction limit.
Choosing the standard deduction can help many people because it has a higher amount and new tax brackets. For instance, if you itemized deductions last year and anticipate a total lower than the increased standard deduction—$29,200 for married couples or $14,600 for singles—switching to the standard deduction could be a prudent move.
For those near the standard deduction threshold, increasing charitable contributions might justify itemizing. In such cases, employing a "bunching" strategy in 2023 could prove beneficial.
This strategy combines charitable deductions from multiple years into one year. It may surpass the standard deduction next year. It has the potential to lower your tax bracket.
In the coming years, even if you don't donate, you can still qualify for the basic deduction. This will help you save a significant amount of money on taxes over multiple years. At the same time, you will be able to contribute the same amount to charity.
Furthermore, considering a Roth conversion in the coming year could be opportune. Given the new tax rates and recent market fluctuations, converting funds from a traditional IRA to a Roth might incur lower taxation. A 2024 conversion could be especially advantageous for individuals expecting higher tax rates in the future.
Save more in your 401(k).
The IRS changed the tax code, which impacts retirement planning and other areas, as well as tax benefits.
Employees enrolled in a 401(k) scheme through their workplace can contemplate boosting their contributions in the upcoming year. The IRS increased the maximum amount of money people can contribute to retirement plans in 2024.
The new limit is $23,000, which can be contributed before taxes or to a Roth account, depending on the plan rules. This is an increase from $22,500 in 2023. Individuals aged 50 and above can continue to make catch-up contributions of $7,500, mirroring the 2023 allowance.
2024 IRA Contributions
The IRA contribution limits for 2024 have been raised to $7,000, up from $6,500 in 2023. (The allowances for catch-up contributions remain unchanged.)
Contributing to a 401(k) or IRA can lower your taxable income. The money in these accounts is only taxed when you withdraw it during retirement.
2024 HSA Limits
In 2024, the IRS has raised the annual contribution limits for health savings accounts (HSAs). The adjustments for inflation allow individuals to save up to $4,150, an increase from $3,850 in 2023. For family coverage, the contribution limits have surged to $8,300 from $7,750.
People who are 55 or older can add an extra $1,000 to their contribution, following the 2023 rules. HSAs help people save for increasing healthcare costs now and in retirement.
Bottom Line
The 2024 tax changes aim to help with inflation and make it easier to save for retirement. To maximize the benefits of these changes in 2023 and beyond, it is advisable to hire a financial professional. This will ensure that you make the most of the opportunities presented by the changes.
A tax professional will have the knowledge to navigate the complexities of the new tax regulations. They will be able to provide guidance and advice tailored to your specific situation. By hiring a financial professional, you can stay informed and make informed decisions that could positively impact your financial situation.
Sources:
https://www.fidelity.com/learning-center/personal-finance/tax-brackets-2024
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