by Bria Overs
The Internal Revenue Service announced the annual inflation adjustments for over 60 tax provisions earlier this month, including changes to standard tax deductions, income tax brackets, and the Earned Income Tax Credit.
In addition to tax adjustments, they also announced increased contribution limits for most retirement plans. These changes will start in 2024 and apply to the 2025 filing year.
The inflation adjustment prevents Americans from dealing with higher taxes on their “inflation-adjusted incomes” because “average real incomes aren’t rising, they’re falling,” according to Robert McClelland, senior fellow at the Tax Policy Center.
“The marginal tax rates, or the thresholds above which you move into the next marginal tax bracket, are pretty similar [to previous years,” John Anderson, a certified financial planner with Equitable Advisors, tells Word In Black. “It’s not like when we had the larger changes from the Trump tax cuts and the Bush tax cuts in the early 2000s.”
Here is a breakdown of the shifts expected to start in the new year.
Changes to Standard Deductions
For single filers and married couples filing separately, the standard deduction is rising to $14,600 for 2024, an increase of $750 from 2023. Similarly, married joint filers are going up to $29,200, an increase of $1,500, and $21,900 for heads of households, an increase of $1,100.
Standard deductions are a portion of income that is not taxable and can be used to reduce tax bills during filing season. The amount is based on filing status, age, and other factors. The standard amount is adjusted each year for inflation.
Changes to the Income Tax Brackets
Tax brackets are the ranges of income that are subject to a specific tax rate. According to Investopedia, this system is progressive and “increases as an individual’s income grows. Low incomes fall into tax brackets with relatively low income tax rates, while higher earnings fall into brackets with higher rates.”
The new rates for the 2024 are:
- 10 percent for income up to $11,600 or less (or $23,200 for married couples jointly filing)
- 12 percent for payment over $11,600 ($23,200 for joint filers)
- 22 percent for income over $47,150 ($94,300 for joint filers)
- 24 percent for income over $100,525 ($201,050 for joint filers)
- 32 percent for income over $191,950 ($383,900 for joint filers)
- 35 percent for income over $243,725 ($487,450 for joint filers)
- 37 percent for income over $609,350 ($731,200 for joint filers)
Here is what they were for this year:
- 10 percent for income up to $11,000 or less (or $22,000 for married couples jointly filing)
- 12 percent for income over $11,000 ($23,200 for joint filers)
- 22 percent for income over $47,150 ($94,300 for joint filers)
- 24 percent for income over $100,525 ($201,050 for joint filers)
- 32 percent for income over $191,950 ($383,900 for joint filers)
- 35 percent for income over $243,725 ($487,450 for joint filers)
- 37 percent for income over $609,350 ($731,200 for joint filers)
For example, the median household income for Black Americans in 2022 was $53,860. If used as taxable income, under the new rates, a single filer would be taxed at 10 percent for the first $11,600, and the remaining $42,260 would be taxed at 12 percent.
Changes to the Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable credit for low-income qualifying filers to lower the tax owed. Most who are eligible must file a tax return even if they do not owe any taxes or usually would not be required to file.
For 2023, the limits are:
- $600 for filers with no dependents
- $3,995 for one dependent
- $6,604 for two dependents
- $7,430 for three dependents
The new credit limits are:
- $632 for filers with no dependents
- $4,213 for one dependent
- $6,960 for two dependents
- $7,830 for three dependents
Changes to Retirement Contributions
Starting in 2024, Americans can contribute up to $23,000 a year into their 401(k) plans, which is $500 more than in 2023. This increase applies to 403(b), most 457 plans, and the Thrift Savings Plan for federal government employees.
Catch-up contributions to retirement plans for workers 50 and older will not change in the new year and remain at $7,500 for 2024—retirement contributions for the age group max at $30,500.
Individual retirement accounts (IRAs) have new increases as well. The limit for 2024 will be $7,000, up from $6,500.
Anderson says people need to think about how they want to deal with retirement in the future.
“The problem is we don’t have a crystal ball to know what the tax code will look like in the future,” he adds. “When I look at the tax brackets right now, quite frankly, we’re in one of the lowest income tax environments, and that may not always be the case.”
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