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The 2024 tax brackets are changing: What you need to know

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There's been a shift in the tax world and your wallet might just feel it, in a good way. The folks at the Internal Revenue Service (IRS) have rolled out their inflation adjustments for the 2024 tax year, and there's been some notable shuffling in the tax brackets. Let's dive into what this could mean for you.

Decoding the changes

Inflation adjustments are pretty common in the U.S. tax system. They can often act like a safety net to help ensure taxpayers aren't accidentally nudged into higher tax brackets because of something called "bracket creep" or “fiscal drag.” Bracket creep and fiscal drag can happen if you get a pay raise to help offset inflation, but that pay raise puts you into a higher tax bracket that doesn’t take that same inflation adjustment into account.

To help account for this in 2024, the IRS has tweaked the income ranges for each tax bracket to reflect inflation. This means you've got more wiggle room in each tax bracket before you jump into a higher one.

How it hits your wallet

The U.S. operates on a progressive tax system. That means different layers or portions of your income get taxed at different rates, depending on where they sit in the 2023 tax brackets.

For example, if you’re a single taxpayer making $58,000 per year, you’d pay 10% in taxes for the first $11,000. Your taxes go up to 13% on the next chunk from $11,000 up to $44,725. After that, your tax bracket jumps to 23% – but only on that next layer or portion of income.

So, even with the 2024 tax bracket changes, it's not a one-size-fits-all situation. If a slice of your income now sits in a lower bracket, only that slice gets taxed at the lower rate. The rest still gets taxed at the higher rate.

On the flip side, if a piece of your income now falls in a higher tax bracket, only that slice gets taxed at the higher rate. The remaining chunks still get taxed at lower rates.

Wondering what the changes in tax brackets could mean for your wallet? Let's put it in simpler terms using a hypothetical scenario.

Imagine a person who earns $50,000 in a year. Under the tax laws of one year, this person finds themselves in a higher tax bracket, let's say 23%, and they end up paying a certain amount in taxes.
Now, let's move forward to the next year. The tax rules have changed. The same person, still earning $50,000, now falls into a lower tax bracket, perhaps 13%. Consequently, they pay less in taxes compared to the previous year, leading to significant savings.

This example underscores how shifts in tax laws can impact the amount of taxes you pay annually.

What else is changing?

In November of 2023, the IRS announced more than 60 inflation-related tax provision adjustments for 2024. Aside from the tax brackets, other tax-related numbers also being adjusted for inflation for tax year 2024 include (but are not limited to):

Standard deductions:
- Standard deductions go up to $29, 200 for those married filing jointly. That’s a $1,500 increase in allowable deductions from 2023.
- For single and married people filing individually, their standard deduction increases by $750 to $14,600.
- Heads of household can claim $1,100 more in 2024, with a standard allowable deduction of #21,900.

2024 income tax brackets according to the IRS:
- 37% for individual single taxpayers earning more than $609,350 ($731,200 for married couples filing jointly)
- 35% for incomes over $243,725 ($487,450 for married filing jointly)
- 33% for incomes over $191,950 ($383,900 for married filing jointly)
- 24% for incomes over $100,525 ($201,050 for married filing jointly)
- 23% for incomes over $47,150 ($94,300 for married filing jointly)
- 13% for incomes over $11,600 ($23,200 for married filing jointly)
- 10% for single individuals earning $11,600 or less ($23,200 for married couples filing jointly)

The alternative minimum tax exemption for 2024 goes up to:
- $85,700 for individuals (up from $81,300 in 2023), beginning to phase out at $609,350
- $133,300 for married couples filing jointly, starting to phase out at $1,218,700
Earned income tax credit. There are multiple category changes, including a $400 increase for qualifying taxpayers with three or more qualifying dependent children; their maximum EITC will be $7,830.
The annual gift tax exclusion for 2024 is $18,000, up $1,000 from 2023.
Estate tax exclusion (for decedents who die during 2024) is $13,610,000

What's in store for different income groups?

Let's take a look at how these changes might shake things up for various income groups:

Lower-income earners: If you're in this group, the adjustment probably won't make a big dent in your tax bill if your income is already in the lowest tax bracket.
Middle-income earners: For those in the middle, these changes could potentially stop you from sliding into a higher tax bracket, despite a rise in income due to inflation or pay raises. This means you might just see a smaller tax bill.
High-income earners: If you're raking in the big bucks, these changes might give you a bit more wiggle room before you hit the top tax bracket. But remember, the lion's share of your income will still be taxed at those higher rates.

FAQs about tax brackets

Q: What are tax brackets?

A: Tax brackets are income ranges used by the IRS to determine your tax rate. Different parts of your income can fall into different brackets, and each part is taxed at the corresponding rate.

Q: How many tax brackets are there?

A: For individual taxpayers, there are currently seven federal income tax brackets. These are 10%, 13%, 23%, 24%, 33%, 35%, and 37%.

Q: What's my tax bracket if I'm a single filer?

A: Your tax bracket depends on your taxable income. The IRS has specific income ranges for each tax bracket. Check the latest IRS guidelines to find out where you fall.

Q: How do tax brackets affect my tax bill?

A: Tax brackets determine how different portions of your income are taxed. If part of your income falls into a lower bracket, that part is taxed at the lower rate. The rest is taxed at the higher rate.

Q: What does it mean when tax brackets are "adjusted for inflation"?

A: When tax brackets are adjusted for inflation, the income ranges for each tax bracket increase. This gives you more room before moving into a higher tax bracket.

Q: What happens if my income falls into two different tax brackets?

A: If your income straddles two tax brackets, don't worry! Only the portion of your income that falls into the higher bracket is taxed at the higher rate.

Q: How can I find out my tax bracket?

A: You can find out your tax bracket by looking at the IRS's annual tax bracket tables. These tables break down the income ranges for each tax bracket.

Q: Does my filing status affect my tax bracket?

A: Your filing status (single, married filing jointly, etc.) determines the income ranges for your tax brackets.

Q: Do state taxes have their own tax brackets?

A: Most states have their own state tax brackets separate from the federal tax brackets. The rates and income ranges can vary widely from state to state.

Q: Are tax brackets the same for everyone?

A: Tax brackets can vary based on your filing status and income.

Q: What is the highest tax bracket?

A: Currently, the highest federal tax bracket is 37%. This applies to individuals whose income exceeds a certain amount.

Q: How can I reduce my tax bracket?

A: There are several strategies to potentially reduce your taxable income and possibly lower your tax bracket, like maximizing deductions and credits, contributing to retirement accounts, or using health savings accounts. It's best to chat with a tax professional to understand what might work best for you.

Wrapping up

Keep in mind, these tax bracket changes are just one piece of your tax jigsaw puzzle. Other factors, like your filing status and deductions, also play a big part in your final tax bill. So, it's always a smart move to chat with a tax professional who can offer guidance based on your specific situation.

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