In a recent update, the Internal Revenue Service (IRS) has shared the latest adjustments to income tax brackets and standard deductions for the upcoming tax season in 2024-2025. This news, revealed in the annual inflation adjustments report on Thursday, indicates a 5.4% increase in income thresholds across all tax brackets.
The IRS makes these adjustments every year, using a formula based on the consumer price index. The goal is to tackle inflation and prevent what’s known as “bracket creep,” a situation where inflation pushes taxpayers into higher brackets without an actual increase in their income or purchasing power.
Although the 5.4% bump is slightly less than the 7% increase we saw last year, it’s still a significant change, especially when compared to times when inflation was lower, currently standing at 3.7%.
As per the 2017 Tax Cuts and Jobs Act, there are seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates are applied progressively, meaning the more you earn, the higher the percentage of taxes you pay.
For the 2024 tax year, the lowest rate of 10% will apply to individuals with taxable income up to $11,600 and joint filers up to $23,200. The top rate of 37% will apply to individuals making above $609,350 and married couples filing jointly earning $731,200 or more.
Now, let’s talk about standard deductions for 2024. Married couples filing jointly will enjoy a $1,500 increase, bringing the total to $29,200 from the previous year’s $27,700. Single taxpayers will have a standard deduction of $14,600, up from $13,850, and heads of households will see a boost of $1,100, making their standard deduction $21,900 compared to 2023’s $20,800.
In addition to these changes, there are several other noteworthy adjustments for 2024:
- Social security benefits will increase by 3.2%, providing recipients with more than a $50 monthly boost starting in January.
- The contribution limit for Flexible Spending Accounts (FSA) will increase to $3,200, up from $3,050.
- Employee contributions to 401(k), 403(b), and most 457 plans are now capped at $23,000, up from the 2023 limit of $22,500.
- Annual contributions to an Individual Retirement Account (IRA) are capped at $7,000, up from the previous limit of $6,500.
These changes reflect the IRS’s commitment to keeping tax policies aligned with the economic landscape, ensuring fairness and accuracy in the taxation system for the upcoming fiscal year. As always, it’s advisable for taxpayers to stay informed and consider seeking guidance from tax professionals to navigate these changes effectively based on their individual financial situations.