The IRS is set to introduce new income limits for its seven tax brackets, providing potential relief to taxpayers in 2024.
The adjustments, accounting for the impact of inflation, will see the tax brackets move upward by 5.4%. This change is based on a formula tied to the consumer price index, reflecting the costs of goods and services commonly purchased by consumers.
IRS Adapts to Inflation
The move follows the IRS’s historic expansion of tax brackets by 7% the previous year, addressing the challenges posed by high inflation.
Annual adjustments to tax brackets and various provisions, such as retirement fund contribution limits, help counteract the effects of inflation and prevent bracket creep. This phenomenon occurs when workers are pushed into higher tax brackets due to cost-of-living adjustments or raises, even if their standard of living remains unchanged.
The progressive nature of U.S. taxation, as defined by the 2017 Tax Cuts and Jobs Act, involves seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Contrary to a common misconception, taxpayers do not pay the highest tax rate on every dollar earned; rather, each rate applies to the income within its respective bracket.
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Heads of Households Rejoice
The standard deduction is also set to increase by 5.4% in 2024. Married couples filing jointly will enjoy a standard deduction of $29,200, a $1,500 increase from the current tax year.
Single taxpayers and married individuals filing separately will have a standard deduction of $14,600, up by $750, while heads of households will benefit from a $21,900 standard deduction, an increase of $1,100.
To determine their tax bracket, individuals can calculate their highest taxable income, subtract the standard deduction, and apply the corresponding rates.
While the marginal tax rate represents the highest tax rate on income, the effective tax rate considers the various rates applied to different portions of income. As taxpayers prepare to file their 2024 taxes in early 2025, these adjustments aim to provide a fair and reflective approach to income taxation.
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