2024 Tax Update

Every year, the formula for personal income taxes changes at least a little bit.  Some of these changes are made by Congress, and others are simply cost-of-living adjustments that the IRS calculates according to the tax code.  The historically high inflation of 2022 led to some significant changes for the 2023 tax year.  However, with lower inflation in 2023, the charges are not as significant.

The standard deduction for married couples filing jointly for tax year 2024 rises to $29,200, up $1,500 from the prior year. For single taxpayers and married individuals filing

separately, the standard deduction increases to $14,600 for 2024, up $750, and for heads of households, the standard deduction will be $21,900 for tax year 2024, up $1,100 from the amount for tax year 2023.  In addition, taxpayers aged 65 and over get a bonus of $1,950 to their standard deduction for singles and $1,550 each for married filers.

The tax rates remain the same as 2023, but the level of income needed to be included in these brackets has increased.  The tax bracket income levels have all increased by just over 5%.  For example, for married filers to stay in the 12% bracket, they will need to keep their income under $94,300 in 2024 compared to $89,450 in 2023.  The tax rates for ordinary income are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Contribution limits to Health Savings Accounts and retirement accounts have also been increased for 2024.  HSA limits have been increased from $3,850 to $4,150 for single taxpayers and up to $8,300 from $7,750 for families.  In addition, taxpayers 55 or older can contribute an extra $1,000 to their HSA accounts. 

Traditional and Roth IRA contribution limits are also increasing in 2023.  The new limit is $7,000 per person in 2024, up from $6,500 in 2023.  Those who are aged 50 and over can contribute $8,000 this year.  Taxpayers can contribute to either Traditional or Roth IRAs, or both, if the total contribution does not exceed these limits.  However, you or your spouse must have earned income equal to or greater than the amounts contributed.

The income limit needed to make Roth IRA contributions has also been adjusted.  In 2024, married taxpayers can make full Roth IRA contributions up to $230,000 of income with a phaseout amount available up to $240,000.  Single filers reach the phaseout of the Roth contribution ability from $146,000 to $161,000. 

The limit on employee contributions to a 401(k) is now $23,000 instead of $22,500 last year.  Those aged 50 and older can now defer an additional $7,500 to increase the total to $30,500.  Simple IRA contribution limits are up from $15,500 to $16,000, with a $3,500 catch-up bonus for those 50 and over.  SEP IRA contribution limits are increased from $66,000 to $69,000.

For those interested in making gifts to family or friends, the annual gift tax exclusion has jumped from $17,000 to $18,000 in 2024.  This is the amount any individual can gift to another individual without triggering a gift tax or even requiring a gift tax return.

On the flip side, the Social Security wage base has also been indexed to inflation.  This is the amount of earned income that is subject to Social Security taxes before the tax doesn’t apply.  The wage base has increased to $168,600, up from $160,200 in 2023.  If you have already started Social Security benefits but have not reached your full retirement age, the amount of earned income that you may receive before triggering any penalties is now $22,320 for the calendar year 2023.  Above that threshold, one dollar in benefits will be penalized for every $2 earned.

Currently, Congress is working on a tax bill that has gained bi-partisan support at the committee levels of both the House and Senate.  Tax bills are generally uncommon in election years, although this one is relatively small.  The most important part for individual taxpayers is setting the refundable amount of the child tax credit to a higher level. 

Currently, the child tax credit for children under 17 is $2,000 per child.  However, only $1,600 is refundable, meaning taxpayers can only use the full credit to reduce their taxes.  If their tax bill is already at zero, they will only receive up to $1,600 per child.  The new bill changes this refundable amount to $1,800 for 2023, $1,900 in 2024, and $2,000 in 2025.  After that, the amount of the credit would be adjusted for inflation. 

In 2021, Congress expanded the child tax credit to $3,600 per child and paid these credits in advance monthly.  As a result, child poverty rates declined drastically as parents used the funds to cover rent, food, and other necessities.  That higher amount expired at the end of that year, and child poverty rates came back up.  This bill still has a long journey to President Biden’s desk, but it looks to be on its way. 

As always, we will provide our clients with annual tax planning updates based on their specific situations.  If you would like to see the impact of these changes, please let us know, and we will prepare a customized tax projection for you.