IRS recently announced tax inflation adjustment for tax year 2024

As individual taxpayers, staying informed about the latest IRS tax adjustments is important for effective financial planning. The IRS has recently announced key changes for the 2024 tax year, set to impact returns filed in 2025. These adjustments, primarily driven by inflation, include increases in standard deductions, changes in tax rates and brackets, and modifications to various tax credits and benefits. 

Standard Deduction 

One of the most significant changes is the increase in standard deductions. For married couples filing jointly, the deduction will be $29,200, an increase of $1,500 from 2023. Single taxpayers and those married but filing separately will see their deduction rise to $14,600, up by $750. Heads of households get a bump to $21,900, an increase of $1,100. These increases mean you can earn more before owing income tax, potentially lowering your tax bill. 

Marginal Rates 

The tax rates for 2024 remain unchanged, but the tax brackets have widened due to the inflation adjusted numbers. The top tax rate is still 37% for single taxpayers with incomes exceeding $609,350, and for married couples filing jointly with incomes over $731,200. Understanding your tax bracket is essential for tax planning and estimating your liability. Other rates include: 

Rate  Single – Incomes Over  Married Filing Joint – Incomes Over 
35%  $243,725  $487,450 
32%  191,950  383,900 
24%  100,525  201,050 
22%  47,150  94,300 
12%  11,600  23,200 
10%  Less than $11,600  Less than $23,200 

Alternative Minimum Tax (AMT) 

For 2024, the exemption amount for single filers under the AMT has been raised to $85,700, marking an increase of $4,400 from the previous year. Married couples filing jointly will see a more substantial rise, with their exemption amount reaching $133,300, up by $6,800. These increased exemption amounts mean a larger portion of your income is shielded from the AMT, potentially reducing your tax liability. 

Moreover, the phase-out thresholds, where the AMT exemptions begin to diminish, have also been adjusted upward. For single filers, the phase-out now starts at $609,350, up by $31,200 from the previous year. For married couples filing jointly, the phase-out begins at a threshold of $1,218,700, an increase of $62,400. This upward adjustment in phase-out thresholds further lessens the likelihood of falling into the AMT trap, especially for taxpayers with higher incomes. 

These changes in the AMT structure are particularly relevant for individuals with large deductions or those with types of income that are treated differently under the AMT system. Taxpayers in states with high property taxes or those with substantial state income tax liabilities often find themselves subject to AMT calculations. The increased exemption and phase-out levels for 2024 offer a buffer against the AMT, providing a bit more room for tax planning and potentially reducing the overall tax burden for those in higher income brackets. 

Earned Income Tax Credit (EITC) 

The EITC, a valuable credit for low to moderate-income earners, especially those with children, sees an increase. The maximum amount for 2024 is now $7,830 for taxpayers with three or more qualifying children, a $400 increase from 2023. 

Transportation Fringe Benefit & Parking 

The IRS has increased the monthly limit for qualified transportation fringe benefits and qualified parking to $315 for 2024. This change allows for greater pretax contributions toward commuting and parking costs, offering more savings potential for taxpayers utilizing these benefits. 

Health Flexible Spending Arrangements (FSA) 

In another significant adjustment, the employee salary reduction limit for Health FSAs has been increased to $3,200, with the maximum carry-over amount now at $640. This enhancement provides more flexibility in managing healthcare expenses through pretax contributions. 

Medical Saving Accounts (MSA) for High Deductible Health Plans 

The annual deductible for self-only coverage has been adjusted from a minimum of $2,800 to a maximum of $4,150. This means individuals must incur these amounts in medical expenses before their insurance starts to pay. 

Additionally, the maximum out-of-pocket expense limit for self-only coverage is now $5,550. For family coverage, the annual deductible range is now $5,550 to $8,350, with a maximum out-of-pocket expense limit of $10,200. These changes affect how much you can spend and save for healthcare costs, making reviewing and adjusting your financial planning regarding healthcare expenses essential. 

Foreign Earned Income Exclusion 

The foreign-earned income exclusion has been increased to $126,500, offering tax relief for those working abroad. 

Estate Tax 

The basic exclusion amount for estate taxes is now $13,610,000, and the annual exclusion for gifts has been raised to $18,000. These changes can significantly impact estate planning and wealth transfer strategies. 

Adoption Credit 

The maximum credit for qualified adoption expenses has been increased to $16,810, providing additional support for those considering adoption. 

Unchanged Items 

While several items have been adjusted, some remain unchanged for the 2024 tax year: 

  • Personal Exemption: The personal exemption remains at 0, as this was repealed with the passing of the Tax Cuts and Jobs Act (TCJA) in 2018. Itemized Deductions: There is no limitation on itemized deductions for 2024. This policy, established by TCJA, remains in effect, allowing taxpayers to itemize deductions without a cap. 
  • Lifetime Learning Credit Income Thresholds: The modified adjusted gross income thresholds for the Lifetime Learning Credit remain unchanged. These thresholds are $80,000 for single filers and $160,000 for joint filers, not adjusted for inflation. This stability in thresholds is essential to consider when planning for education-related tax credits. 

Questions? 

The 2024 tax year brings a mix of adjustments and stable policies. These changes can influence various aspects of your financial planning, from reducing taxable income to strategizing around education credits and healthcare expenses. Consulting with a trusted tax professional is recommended to navigate these changes effectively and tailor your tax planning to your personal financial situation. Contact an Adams Brown advisor today.