IRS Announces 2024 Tax Inflation Adjustments

Every September the Bureau of Labor Statistics (BLS) produces the August consumer price index. The IRS reviews the figures and then applies to the roughly 60 tax items that are required to be adjusted for inflation annually. The result is the various rates and tax brackets change to keep up with inflation. This process ensures that taxpayers are not forced into higher brackets without genuine income increases.  The agency recently released its annual inflation adjustments for 2024. This includes updates to the standard deduction, tax credits, retirement saving limits, and more. The specific details are outlined in Rev. Proc. 2023-24 and Notice 2023-75. To help clients, prospects, and others, DWD CPAs have provided a summary of the key details below.

Income Tax Brackets

The top tax rate for single taxpayers will still be 37%, and this applies to taxpayers with incomes over $609,350, or $731,200 for married joint filers.

Tax brackets are as follows for individual income, with married joint-filing incomes in parentheses:

• 35%: Over $243,725 ($487,450)
• 32%: Over $191,950 ($383,900)
• 24%: Over $100,525 ($201,050)
• 22%: Over $47,150 ($94,300)
• 12%: Over $11,600 ($23,200)
• 10%: $11,600 or less ($23,200 or less)

Standard Deduction Increases

Standard deductions for tax year 2024 will be $14,600 for single and married taxpayers who file independently, and $29,200 for married filing jointly. This is an increase of $750 for individuals and $1,500 for couples compared to the previous year. Heads of household will have a $21,900 standard deduction, an increase of $1,100.

Earned Income Tax Credit

The earned income tax credit (EITC) often applies to low- to middle-income taxpayers with children. In tax year 2024, the maximum EITC will be $7,830 for taxpayers who qualify and have 3 or more qualifying children, a $400 increase from 2023.

Alternative Minimum Tax Exemption

The alternative minimum tax (AMT) is a system designed to ensure that high-income taxpayers are paying a certain tax minimum. For tax year 2024, the alternative minimum tax exemption is $85,700 ($133,300 for married joint filers) and begins to phase out at $609,350 ($1,218,700). Those who have income in higher brackets and/or earn income from certain tax preferences or adjustment items may be subject to AMT. Once income for the AMT reaches phaseout thresholds, the exemption “phases out” at 25 cents per dollar over the threshold.

Qualified Transportation & Qualified Parking

Employers that provide their employees with transportation benefits, such as mass transit passes, qualified parking, and vanpool reimbursements, should know that the monthly limits for qualified transportation fringe benefits and qualified parking will increase to $315 in tax year 2024.

Flexible Spending Arrangements (FSA)

Employees who have FSAs can contribute up to $3,200 of their pre-tax salary to the accounts. Up to $640 of unused FSA funds can be carried over into the following year.

Medical Savings Accounts

Participants with self-only coverage in medical savings accounts will have annual deductibles between $2,800 and $4,150. The maximum out-of-pocket expenses will be $5,550. For families, the annual deductible will be between $5,550 and $8,350, and the out-of-pocket expense limit will be $10,200.

Foreign Earned Income

The foreign-earned income exclusion (FEIE) allows certain taxpayers to exclude some of their foreign-earned income from their U.S. taxable income. For tax year 2024, the exclusion amount will be $126,500.

Gift Tax Exclusions

Gift tax exclusions will be $18,000 in tax year 2024, up from $17,000 in the previous year.

Basic Exclusion Amount

The basic exclusion amount details how much an estate can pass to heirs tax-free. Estates with decedents who die in 2024 will have a BEA of $13,610,000, an increase of $690,000 from 2023.

Hazardous Substance Superfund Financing Rate

The Inflation Reduction Act has brought back the Hazardous Substance Superfund financing rate. The tax on crude oil and petroleum products will increase in calendar years beginning in 2024 – products imported after Dec 31, 2016, will have a tax rate of 26 cents per barrel.

Qualified retirement plans

Notice 2023-75 published updates for qualified retirement plans and accounts for tax year 2024. Maximum allowed contributions to 401(k) plans will increase by $500 to $23,000 in 2024. This will also apply to most Sec. 457 plans, as well as 403(b) plans and the Thrift Savings Plan.

The catch-up contribution for 401(k), 403(b), and most 457 plans for taxpayers 50 and older will stay at $7,500 in 2024. This means contributions can max out at $30,500 in 2024. Traditional and Roth IRA contributions will increase to $7,000, with the catch-up contribution remaining at $1,000.

SIMPLE contributions will increase to $16,000 max, with catch-up contributions staying at $3,500.

Income Ranges for IRA Deductions

Income ranges have also increased for deductible contributions to IRAs, Roth IRA contributions, and Saver’s Credit claims.

Phaseout ranges for traditional IRA deductions will be between $77,000 and $87,000 for single taxpayers who are covered by workplace retirement plans. Phaseouts don’t apply to those who are not covered by retirement plans at work, same for married filers who are both not covered.

The phaseout range will be between $123,000 and $143,000 for married couples filing jointly if the person making IRA contributions is covered by a workplace plan.

If someone contributes to an IRA and is not covered, but their spouse is, the phaseout range is between $230,000 and $240,000.

Income Ranges for IRA Contributions

Income limits for Roth IRA contributions have also increased. Singles and heads of household phaseout ranges will be between $146,000 and $161,000. Married couples filing jointly will be in the range of $230,000 and $240,000. The contribution phaseout range for someone who is married and filing individually will remain between $0 and $10,000.

The Retirement Savings Contributions Saver’s Credit, also known as the Saver’s Credit, will have an income limit of $76,500 for married couples filing jointly in tax year 2024. The limit will be $57,375 for heads of household and $38,250 for singles and married people who file separately.

Contact Us

If you have any questions about these upcoming changes and how they might impact your future tax planning, contact us today.