It is crucial for individuals to engage in strategic tax planning with their financial advisors, particularly considering the upcoming changes to the standard deduction and 2024 income tax brackets. These modifications, affecting filers who do not itemize their deductions, will only be reflected in the tax returns filed in early 2025.
The Internal Revenue Service has elevated the thresholds for its seven tax brackets by 5.4% in 2024. This adjustment implies that a single person can now earn up to $609,350 before facing taxation at the highest rate of 37 percent. Understanding and leveraging these changes can significantly impact one’s tax liability.
Reasons for Adjustments:
The Federal Reserve’s efforts to mitigate inflation have influenced adjustments in the consumer price index, linked to tax changes. Despite some success in curbing inflation, the index continues to rise. The IRS routinely adjusts figures in the tax code for inflation. For instance, the maximum Earned Income Credit for low-income workers with children has increased to $7,830, and health savings account contributions are now limited to $3,200.
Estate planning considerations are crucial, given the rise in the estate tax threshold to $13.61 million, and the gift tax threshold increased to $18,000. Collaborating with a financial advisor is not only advantageous but imperative. A skilled advisor helps navigate evolving tax landscapes, identifies tax-saving opportunities, and ensures financial strategies align with the current regulatory environment. This proactive tax planning is essential for optimizing financial outcomes and minimizing tax burdens.
Deduction Increases:
- In 2024, the standard deduction for married couples filing jointly increased to $29,200, a $1,500 rise from 2023.
- Single taxpayers and married individuals filing separately now have a standard deduction of $14,600 for 2024, a $750 increase from the previous year.
- Heads of households will see their standard deduction rise to $21,900 for the tax year 2024, a $1,100 increase compared to 2023.
Tax Rates:
For the 2024 tax year, the top tax rate remains 37% for individual single taxpayers with incomes greater than $609,350 ($731,200 for married couples filing jointly).
The other marginal tax rates are as follows:
- 35% for incomes over $243,725 ($487,450 for married couples filing jointly)
- 32% for incomes over $191,950 ($383,900 for married couples filing jointly)
- 24% for incomes over $100,525 ($201,050 for married couples filing jointly)
- 22% for incomes over $47,150 ($94,300 for married couples filing jointly)
- 12% for incomes over $11,600 ($23,200 for married couples filing jointly)
- The lowest rate is 10% for incomes of single individuals with incomes of $11,600 or less ($23,200 for married couples filing jointly).
Additional Changes:
- The Alternative Minimum Tax exemption amount for the tax year 2024 is set at $85,700 and begins to phase out at $609,350 ($133,300 for married couples filing jointly, where the exemption starts to phase out at $1,218,700). In comparison, the 2023 exemption amount stood at $81,300, with the phase-out beginning at $578,150 ($126,500 for married couples filing jointly, where the exemption phased out at $1,156,300).
- The maximum Earned Income Tax Credit amount for tax year 2024 is $7,830 for qualifying taxpayers with three or more qualifying children, marking an increase from $7,430 in the tax year 2023. The revenue procedure includes a table outlining the maximum EITC amount for various categories, along with income thresholds and phase-outs.
- In tax year 2024, the monthly limitation for the qualified transportation fringe benefit and qualified parking increases to $315, up by $15 from the limit in 2023.
- For taxable years starting in 2024, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements rises to $3,200. In cases where cafeteria plans allow the carryover of unused amounts, the maximum carryover amount is $640, a $30 increase from taxable years beginning in 2023.
- In the tax year 2024, participants with self-only coverage in a Medical Savings Account must have an annual deductible not less than $2,800 (up by $150 from the tax year 2023) but not more than $4,150 (up by $200 from the tax year 2023). For self-only coverage, the maximum out-of-pocket expense amount is $5,550, a $250 increase from 2023. For family coverage in tax year 2024, the annual deductible is not less than $5,550 (up by $200 from the tax year 2023), and the deductible cannot exceed $8,350 (up by $450 from the tax year 2023). The out-of-pocket expense limit for family coverage is $10,200 for the tax year 2024, up by $550 from tax year 2023.
- For tax year 2024, the foreign earned income exclusion is $126,500, up from $120,000 in tax year 2023.
- Estates of decedents who pass away in 2024 have a basic exclusion amount of $13,610,000, an increase from $12,920,000 for estates of decedents in 2023.
- The annual exclusion for gifts rises to $18,000 for the calendar year 2024, an increase from $17,000 in the calendar year 2023.
- The maximum credit allowed for adoptions for tax year 2024 is the amount of qualified adoption expenses up to $16,810, up from $15,950 in 2023.