The IRS recently adjusted the tax brackets and deductions for the 2024 tax year, and these updates could help put more money back in your hands. From higher standard deductions to new income thresholds, here’s everything you need to know to help you make the most of these changes when it’s time to file in 2025.
Bigger Standard Deductions
First up, the IRS has increased the standard deductions for 2024:
- Married Filing Jointly: Now $29,200 (up $1,500 from 2023).
- Single and Married Filing Separately: Now $14,600 (up $750).
- Head of Household: Now $21,900 (up $1,100).
Why This Matters:
A standard deduction is a dollar amount subtracted from your total income before taxes, lowering what’s taxed. You can legally shield more of your income from taxes with these higher deductions. This is helpful for taxpayers who don’t itemize deductions (like mortgage interest or medical expenses). For example, a married couple filing together could automatically reduce their taxable income by $29,200.
Updated Marginal Tax Rates and Brackets
Marginal tax rates are the percentages at which different portions of your income are taxed. Here are the new brackets for the 2024 tax year:
- 37% for incomes over $609,350 for single filers and $731,200 for married couples filing jointly.
- 35% for incomes over $243,725 (single) and $487,450 (married filing jointly).
- 32% for incomes over $191,950 (single) and $383,900 (married filing jointly).
- 24% for incomes over $100,525 (single) and $201,050 (married filing jointly).
- 22% for incomes over $47,150 (single) and $94,300 (married filing jointly).
- 12% for incomes over $11,600 (single) and $23,200 (married filing jointly).
- 10% for incomes under $11,600 (single) and $23,200 (married filing jointly).
Understanding Marginal Rates:
Marginal rates might sound complex, but they’re more straightforward than they seem. Think of it as paying different “layers” of tax on different parts of your income. For example, if you’re single and make $50,000, your income falls into the 22% bracket, but you don’t pay 22% on the entire $50,000. Instead:
- The first $11,600 gets taxed at 10%.
- The next portion (from $11,600 to $47,150) gets taxed at 12%.
- Only the remaining income above $47,150 gets taxed at 22%.
This method means your overall, or “effective,” tax rate is usually lower than your highest (marginal) bracket rate.
Simple Tips for Adjusting to New Brackets
With these updates, you may want to tweak your tax strategy. Here are a few tips to consider:
- Strategize Income and Investment Timing: If you receive bonuses, capital gains, or other forms of income, timing them could help you stay within a more favorable bracket. For instance, if a bonus might push you into a higher bracket, you could defer it to next year to save on taxes.
- Contribute to Retirement Accounts: Contributions to retirement accounts like a 401(k) or an IRA reduce your taxable income. For business owners, contributing to a SEP IRA or a SIMPLE IRA can also help. These contributions can make staying within a lower bracket easier and potentially lower your tax bill.
- Use Health Savings Accounts (HSAs): An HSA is a tax-advantaged account for people with high-deductible health plans. Contributions are deductible and grow tax-free. Withdrawals for qualified health-related expenses are also tax-free.
Who Benefits Most from These Changes?
These adjustments aim to keep up with inflation, meaning your money stretches a little further. Generally:
- Low to Middle-Income Earners: You could benefit the most from the higher standard deductions, as more of your income is protected from taxes.
- Business Owners and High Earners: You might benefit from the new upper brackets, but plan carefully, especially if you fall within higher income ranges. You can take advantage of lower rates with strategic income and investment planning.
Tax Planning for 2025 with the New Tax Brackets
The 2024 IRS tax adjustments could provide valuable savings opportunities if you understand how to make them work. Whether you aim to reduce your taxable income, take advantage of retirement contributions, or stay within a specific bracket, these changes present opportunities for claiming substantial tax savings.
Important Note About Tax Updates
The details in this blog post are based on the rules for the 2024 tax year, but things can change! The IRS often updates tax rules, so it’s a good idea to watch for new guidelines for 2025.
Tax laws can be tricky and sometimes hard to follow. That’s why it’s always smart to talk to a tax professional. They’ll give you advice that fits your situation and make sure you’re following all the latest rules.
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