The Internal Revenue Service (IRS) has announced significant changes to U.S. tax brackets for 2024, aligning with current inflation trends. This adjustment, increasing the brackets by approximately 5.4 percent, is set to impact workers across various income levels.
Starting in 2024, the lowest tax rate of 10 percent will be applicable to incomes up to $11,600, a rise from the previous $11,000 threshold. Conversely, the highest tax bracket of 37 percent will now affect individuals earning over $609,350, previously set at $578,125. This restructuring also extends to middle-income brackets, potentially leading to considerable savings for numerous American workers.
This update, effective for the 2024 tax year and impacting returns filed in 2025, is part of the IRS's ongoing effort to combat 'bracket creep.' This phenomenon occurs when taxpayers are pushed into higher tax brackets due to inflation, despite no actual increase in their purchasing power. With U.S. inflation rates hovering around 3.7 percent, down from a peak of 9.1 percent in June 2022, the IRS's adjustments are more pronounced this year.
Furthermore, the standard deduction, which is the portion of income not subject to tax, will also see a significant increase. For married couples filing jointly, the standard deduction will rise to $29,200, up from $27,700. For single filers, the new maximum will be $14,600, an increase from the current $13,850.
In addition to these changes, the IRS has enhanced certain tax provisions. The earned income tax credit for families with three or more children will increase to $7,830 per year, a $400 rise from 2023's $7,430. Health flexible spending account contributions will also see a bump, with the maximum contribution rising to $3,200, approximately $150 more than the previous limit.
The IRS has also recently announced new 401(K) contribution limits, allowing savers to contribute an additional $500 per year, bringing the cap from $22,500 to $23,000. This adjustment also applies to 403(b), most 457 plans, and the Thrift Savings Plan. Additionally, the contribution limits on Individual Retirement Accounts (IRAs) will increase from $6,500 to $7,000, though catch-up contributions for IRAs remain unchanged at $1,000.
These adjustments are designed to shield taxpayers from the impacts of inflation, ensuring that their tax burden remains stable even in the face of rising prices and living costs. The changes in tax brackets and standard deductions are not expected to significantly alter individual tax burdens but rather maintain parity with inflation-induced income rises.
As taxpayers plan for the future, understanding these adjustments becomes crucial for effective financial planning. The IRS's proactive steps in aligning the tax structure with current economic conditions aim to provide stability and predictability for American taxpayers.
