Some taxpayers may get a break next year on their taxes thanks to the annual inflation adjustment of tax brackets set by the IRS.
The tax agency hasn’t yet announced the new brackets for 2024, but that is likely to come within the next days or weeks, according to Steve Grodnitzky of Bloomberg Tax, which has issued its own forecast for the new tax brackets as well as other policies that are adjusted for higher prices.
The IRS relies on a formula based on the consumer price index — which tracks a basket of goods and services typically bought by consumers — to adjust many tax policies each year, Grodnitzky noted. Last year, for instance, tax brackets were boosted by a historically large 7% due to the highest inflation in 40 years. Because inflation has eased this year, the annual boost is likely to be more moderate, with brackets rising about 5.4%,
Setting higher thresholds can help avoid so-called “bracket creep,” or when workers are pushed into higher tax brackets due to the impact of cost-of-living adjustments to offset inflation, without a change in their standard of living. It can also help taxpayers shave some of what they owe to the IRS if more of their income falls into a lower bracket as a result of the higher thresholds.
“For the income tax brackets, the dollar amounts have now increased, so for 2023, the lowest bracket for single people is those making up to $22,000, but now it’s up to $23,200, so it basically changes how much you are going to be taxed,” Grodnitzky said.
New tax bracket limits
The tax brackets for the 2024 tax year, set by the 2017 Tax Cuts and Jobs Act, aren’t changing, but the cutoffs for each band of taxation will shift higher. The tax rates will remain 10%, 12%, 22%, 24%, 32%, 35% and 37%.
But it will take more income to reach each higher band of taxation. For instance, a single taxpayer who earns $100,000 in 2024 will have a top marginal tax rate of 24%, whereas in 2023, their top marginal tax rate is 32%.
Tax brackets indicate the percentage you’ll pay in taxes on each portion of your income. A common misconception is that the highest rate is what you’ll pay on all of your income, but that isn’t the case.
Take again the situation of a single taxpayer who earns $100,000. In 2023, she will take a standard deduction of $14,600, reducing her taxable income to $85,400. This year, she’ll pay:
- 10% tax on her first $11,600 of income, or $1,160 in taxes
- 12% tax on income from $11,600 to $47,150, or $4,266
- 22% tax on the portion of income from $44,735 up to her taxable income of $85,400, or $8,946.30
Together, she’ll pay the IRS $14,372.30 in taxes, which amounts to an effective tax rate of 16.8% on her taxable income, even though her top marginal rate is 22%.
Standard deduction
Another important change that could help lower taxes for some is the adjustment to the standard deduction, which is relied on by 86% of taxpayers. The standard deduction is used by people who don’t itemize their taxes, and it reduces the amount of income you must pay taxes on.
Here are the new 2024 standard deduction amounts, according to Bloomberg Tax’s forecast:
- Single taxpayers will have a standard deduction of $14,600, up from $13,850 this year
- Married couples filing jointly will see theirs rise to $29,200, up from $27,700
- Heads of households will have a new standard deduction of $21,900, up from $20,800.
