December 8, 2023

Brighton Journal

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The IRS just announced new tax brackets. Here’s how to see you.

The IRS just announced new tax brackets.  Here’s how to see you.

The IRS adjusts the tax brackets by 5.4% in 2024

The IRS is introducing new income limits for its seven tax brackets, and is adjusting the thresholds to account for the impact of inflation. This may provide some taxpayers with relief on their taxes in 2024.

IRS on Thursday He said It adjusts the tax brackets upward by 5.4%, based on a formula based on the Consumer Price Index, which tracks the costs of a basket of goods and services that consumers typically buy. The 2024 limits come after the IRS last year expanded its tax brackets by a Historically large 7%This reflects the high inflation rate last year.

The IRS adjusts tax brackets annually — as well as many other provisions, such as retirement fund contribution limits — to counter the impact of inflation. This can help avoid so-called “bracket creep,” or when workers are pushed into higher tax brackets due to cost-of-living adjustments or increases even though their standard of living may have remained the same.

Workers can also get a break if more of their taxable income falls into a lower bracket as a result of the higher thresholds. Taxpayers will file their 2024 taxes in early 2025.

Tax brackets

The IRS increased its tax brackets by about 5.4% for each type of tax filer for 2024, such as those filing separately or as spouses.

There are seven federal income tax rates, established by the Tax Cuts and Jobs Act of 2017: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Taxes in the United States are progressive, meaning that tax rates rise as your income increases. However, there is a common misconception that a worker will pay the highest tax rate they are subject to on every dollar of their income – this is not the case. Instead, each tax rate is applied to your income that falls into each bracket.

But by 2024, more of your income will fall into lower tax brackets. For example, in tax year 2023, single filers would pay 10% on the first $11,000 of their taxable income. In 2024, the first $11,600 of taxable income will fall into the 10% tax bracket, meaning $600 of additional income will be taxed at 10%, instead of 12%, in the current tax year.

The so-called marginal rate is the highest tax rate paid on your income, but the effective tax rate — a combination of the rates you pay on different parts of your income — reflects your effective tax rate.

Standard deduction

The IRS said the standard deduction will also increase by 5.4% in 2024. The new standard deduction for married couples filing jointly will rise to $29,200, an increase of $1,500 from the current tax year.

Single taxpayers and married individuals filing separately will receive a standard deduction of $14,600, an increase of $750 over the current tax year.

Heads of household will receive a standard deduction of $21,900, an increase of $1,100.

How to determine your tax bracket

You can check your marginal tax bracket by determining your highest taxable income.

For example, a married couple with $150,000 in gross income first subtracts the 2024 standard deduction from that amount, leaving them with $120,800 of taxable income.

This would put the marginal tax rate at 22%.

However, the effective tax rate is much lower:

  • Their first income of $23,200 will be taxed at 10%, or $2,320 in taxes.
  • Their earnings of $23,200 to $94,300 will be taxed at 12%, or $8,532 in taxes.
  • Their income of $94,300 to $120,800 will be taxed at 22%, or $5,830 in taxes.

Combined, they would pay federal income tax of $16,682, giving them an effective tax rate of about 14%.

Higher limits for FSA and HSA

The IRS is also raising limits on tax-advantaged accounts that help taxpayers pay for health care expenses.

The IRS said flexible spending accounts, which put pre-tax dollars into an account to cover short-term health care costs, will have a cap of $3,200 in 2024. That’s up from $3,050 in the current tax year.

The IRS previously announced the new limits for health savings accounts, or HSAs, aimed at workers with high-deductible health care plans. It will have a new 2024 contribution limit of $4,150 for single taxpayers, a 7.8% increase, while the contribution limit for families will increase to $8,300, or a 7.1% increase from the current year.

People over 55 can put an additional $1,000 into their HSAs, a limit that has not changed this year.

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