When it comes to bracketology, it's not just about college hoops March Madness. In the world of personal finance, the IRS' 2024 tax brackets are must-see TV, too.
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Since you're likely in the throes of the current tax-filing season, now's also a good time to get your so-called tax house in order for the current calendar year.
"While these (2024) taxes are not due for some time, it may benefit you to start thinking ahead," said Rob Leiphart, vice president of financial planning at RB Capital Management.
Tax Brackets: What's New For 2024
Thanks to an annual inflation adjustment from the IRS that will boost the threshold for the standard deduction as well as all seven tax brackets by 5.4%, more of your hard-earned money will be exempt from income taxes in 2024. The seven tax brackets — 10%, 12%, 22%, 24%, 32%, 35% and 37% — will be the same in 2024 as they are for 2023.
In a nutshell, the top income limit for each bracket is going up. So, when you file your 2024 taxes a year from now, it will take more income to fall into each tax bracket. And, as a result, your after-tax paycheck could be slightly bigger in 2024.
"The government's goal is to keep income taxes in sync with consumer buying power," said Leiphart.
And while the inflation adjustment for 2024 is less than the 7% increase last year, the 5.4% increase still outpaces the latest 3.1% print on consumer price inflation (CPI).
"Tax filers are going to be looking at a little more cash in their pockets (this year)," said Moira Corcoran, a CPA and tax expert for JustAnswer, a question-and-answer website featuring verified experts.
Shooting For A Lower Bracket
In fact, there's a good chance that taxpayers who either earn the same income this year or get a regular-size 3% to 4% raise will likely stay in a lower tax bracket. And since they'll have lower odds of getting bumped up to a higher tax bracket, they'll have a lower tax bill when the 2025 tax season rolls around.
Here's a quick example. Let's say a married couple that files jointly earned $190,000 in 2023, keeping them in the 22% tax bracket and just below the 24% tax bracket that kicks in when income tops $190,750. Now, let's assume that the same couple earns 4% more in 2024, raising their dual income to $197,600. They would still avoid having a chunk of their income bumping up to the 24% bracket, as the IRS has increased the income threshold for that higher 24% tax bracket to $201,050 for the 2024 tax year.
"Since the income thresholds have increased for each bracket, you might stay in the same bracket (even if you earn more)," said Corcoran.
Federal Tax Brackets for Ordinary Income: 2024 Vs. 2023
Compare the tax brackets for last year and this year to get a sense of where your income stacks up in the eyes of the IRS.
2023 Federal Tax Brackets With Each Bracket's Marginal Tax Rate, Based On A Taxpayer's Taxable Income
| Tax rate | Single filers | Married joint filers | Heads of households |
|---|---|---|---|
| 10% | $0 - $11,000 | $0 - $22,000 | $0 - $15,700 |
| 12% | $11,001- $44,725 | $22,001- $89,450 | $15,701- $59,850 |
| 22% | $44,726 - $95,375 | $89,451 - $190,750 | $59,851 - $95,350 |
| 24% | $95,376 - $182,100 | $190,751 - $364,200 | $95,351 - $182,100 |
| 32% | $182,101 - $231,250 | $364,201 - $462,500 | $182,101 - $231,250 |
| 35% | $231,251 - $578,125 | $462,501 - $693,750 | $231,2511 - $578,100 |
| 37% | $578,126 or more | $693,751 or more | $578,1011 or more |
2024 Federal Tax Brackets With Each Bracket's Marginal Tax Rate, Based On A Taxpayer's Taxable Income
| Tax rate | Single filers | Married joint filers | Heads of households |
|---|---|---|---|
| 10% | $0 - $11,600 | $0 - $23,200 | $0 - $16,550 |
| 12% | $11,601- $47,150 | $23,201- $94,300 | $16,551- $63,100 |
| 22% | $47,151 - $100,525 | $94,301 - $201,050 | $63,101 - $100,500 |
| 24% | $100,526 - $191,950 | $201,051 - $383,900 | $100,501 - $191,950 |
| 32% | $191,951 - $243,725 | $383,901 - $487,450 | $191,951 - $243,700 |
| 35% | $243,726 - $609,350 | $487,451 - $731,200 | $243,701 - $609,350 |
| 37% | $609,351 or more | $731,201 or more | $609,351 or more |
More Sizable Standard Deduction for 2024
All Americans will get a larger standard deduction.
The standard deduction for married couples filing jointly rises by $1,500 to $29,200. For single filers and married individuals filing separately, the standard deduction increases $750 to $14,600. The standard deduction for heads of households will rise $1,100 to $21,900.
These standard deductions are the hurdle taxpayers who itemize deductions on their tax return will have to beat to take advantage of the higher deduction. For example, a married couple filing jointly will have to have itemized deductions of more than $29,200 to have more of their income spared from taxation. In 2024, like last year, there is no IRS limitation on the dollar amount of itemized deductions.
Alternative Minimum Tax Exemptions Rise
The so-called AMT will have less of a bite in 2024 and could ensnare fewer taxpayers. The alternative minimum tax exemption for married couples filing jointly is $133,300 (up from $126,500 last year) and begins to phase out at $1,218,700 (vs. $1,156,300 in 2023).
For single filers, the AMT exemption for 2024 is $85,700 and begins to phase out at $609,350.
The AMT exemption is the total income a taxpayer can deduct from their AMT taxable income before calculating what alternative minimum tax they owe.
Estate Tax And Gift Tax Exclusions Increase For 2024
Estates of decedents who die during 2024 have a basic exclusion amount of $13.61 million, up from $12.92 million for estates of decedents who died in 2023.
Similarly, the annual exclusion for gifts increases to $18,000 for calendar year 2024, up from $17,000 last year.
The annual gift tax exclusion is the amount you can give to someone else without having to pay a gift tax. Any gift above the exclusion is typically subject to taxes.
The IRS adjustments related to inflation will also impact Medical Savings Accounts, better known as health savings accounts, or HSAs.
For tax year 2024, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,800, up $150 from tax year 2023, but not more than $4,150, or $200 higher than last year. The maximum out-of-pocket expenses amount is $5,550, up $250 from last year. For family coverage, the annual deductible must not be less than $5,550, up $200 from 2023. But the deductible can't be more than $8,350, up $450 from tax year 2023. Families' out-of-pocket expenses limit for 2024 is $10,200, an increase of $550 from last year.
How Understanding Tax Brackets Can Impact Financial Planning
Knowing what tax bracket various levels of your income fall into allows you to pull financial levers that can help you better estimate your paycheck withholding amounts.
For example, thanks to the IRS' inflation adjustment, if your income is about the same or slightly higher this year than last year, you can reduce the amount of money withheld from your paycheck, which will put more money in your pocket.
There are other ways to ace what RB Capital's Leiphart refers to as "bracket maximization."
First, better time your taxable stock sales. If you know, for example, that you have about $10,000 in income before bumping up from, say, the 22% tax bracket to the 24% bracket, you might be more inclined to take profits selling a winning stock, says Corcoran.
"You'll know to sell just enough so as not to bump up into a higher bracket," said Corcoran.
Next, better estimate your quarterly tax payments. If you're an independent contractor or freelancer, you'll be better able to estimate how much you should be paying in quarterly taxes to the IRS if you know where your income falls on the new tax bracket thresholds, Corcoran says.
"Paying attention to income threshold changes is important to financial tax planning," said Corcoran.
Boost Your Deductions
Third, boost deductions to avoid falling into a higher tax bracket. If you know there's a risk that your income will push you into a higher tax bracket, you can take steps early to boost your deductions that lower your taxable income.
For example, you could boost the amount of money you stash in your traditional 401(k), which lowers your taxable income dollar for dollar. Or you can boost the level of your charitable donations, which could boost your itemized deduction. And, if you're a homeowner, you can plan to make your January 2025 mortgage payment before year-end 2024, to increase the amount of interest you can deduct from your 2024 tax form. You could also do tax-loss selling in your investment portfolio, which could enable you to offset all your gains with losses or offset $3,000 in regular income.
"What you have control over is any deductions you take," said Leiphart.
Start Planning Now
And it's not too early to start planning for tax year 2026, as the current Trump tax cuts are set to expire in 2025, which could lead to higher tax rates if Congress doesn't act to extend Trump's tax cuts, adds Leiphart.
Roth IRAs make sense if you think tax rates are going to move higher.
And since the 2024 tax brackets have moved higher, you might be able to convert a traditional IRA to a Roth IRA without having the income tax paid on the conversion bump you into a higher tax bracket.
"That's a lot of money that can be put in a tax-free bucket" for years to come, said Leiphart.
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