Individual Tax

Navigating a New Tax Year: Understanding IRS Inflation Adjustments

Hood & Associates CPAs, PC

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January 25, 2024

As we enter a new tax year, it’s not just your calendar and resolutions that change—several inflation adjustments can impact your taxes. These adjustments, released by the Internal Revenue Service (IRS) each year, ensure that inflation doesn’t erode the value of taxpayers’ paychecks and various tax deductions, credits, retirement contribution limits, and more.

Let’s break down these changes so you know how to plan in 2024.

What are Inflation Adjustments?

Inflation adjustments are annual changes made to various tax provisions. The IRS adjusts these figures to reflect the inflation rate, ensuring that static figures don’t unfairly burden taxpayers in an evolving economy.

When inflation is high, as it has been for the past two years, the IRS’s annual adjustments increase the value of various tax deductions, credits, and other tax provisions.

While these increases might not make a massive dent in your bottom line, being aware of these changes can help your tax planning, allowing you to reduce your tax burden when you file your 2024 return.

Adjustments to Federal Income Tax Brackets

The United States has a progressive federal income tax system, meaning the rate of tax you pay increases as your income rises.

Income tax brackets are ranges of income taxed at particular rates. With annual adjustments, these brackets widen.

Here are the seven tax rates and their income brackets for the 2024 tax year (tax returns filed in 2025):

Marginal Rate Single Filers Married Couples Filing Jointly
10% $11,600 or less $23,200 or less
12% $11,601 to $47,150 $23,201 to $94,300
22% $47,151 to $100,525 $94,301 to $201,050
24% $100,526 to $191,950 $201,051 to $383,900
32% $191,951 to $243,725 $383,901 to $487,450
35% $243,726 to $609,350 $487,451 to $731,200
37% $609,351 and above $731,201 and above

You can find tax bracket tables for Heads of Household and married people filing separate returns in Internal Revenue Bulletin 2023-48.

By adjusting these brackets, the IRS attempts to stop “bracket creep,” or inflation pushing taxpayers into a higher bracket without an increase in their real income.

For example, say you’re a single filer with a taxable income of $96,000. That would put you into the 24% tax bracket in 2023. Now, say your income didn’t change from 2023 to 2024. If the tax brackets didn’t adjust for inflation, you would still be in the 24% tax bracket. However, inflation ranged from 6.4% to 3.0% throughout 2023, so $96,000 of taxable income had less buying power at the end of the year than it did in the beginning.

Because the tax brackets are inflation-adjusted, you’re in the 22% tax bracket in 2024.

Long-Term Capital Gains Tax Brackets

Long-term capital gains—gains on sales of capital assets held for longer than one year—are subject to different tax brackets and rates than ordinary income.

For 2024, those tax brackets are:

Rate Single Filers, Taxable Income Over Joint Filers, Taxable Income Over Heads of Household, Taxable Income Over
0% $0 $0 $0
15% $47,025 $94,050 $63,000
20% $518,900 $583,750 $551,350

Changes in Deductions

The IRS adjusted several deductions for 2024—either the deduction amount or the income thresholds that apply to those deductions. Here are a few you might see on your return.

Standard Deduction

When you file your federal income tax return, you generally choose between claiming the standard deduction—a preset amount based on your filing status—or itemizing deductions.

According to IRS statistics, roughly 87% of taxpayers claim the standard deduction.

For 2024, the standard deduction is:

  • Single and married filing separately: $14,600 (up from $13,850 in 2023)
  • Married couples filing jointly: $29,200 (up from $27,700 in 2023)
  • Heads of household: $21,900 (up from $20,800 in 2023)

Section 179 Deduction

Section 179 of the Internal Revenue Code allows businesses to take an immediate deduction for the cost of depreciable assets, such as equipment, vehicles, and software, rather than capitalizing and depreciating them over multiple years.

The Section 179 expensing limit increased to $1,220,000. That limit gets reduced by the amount that eligible property placed in service during the 2024 tax year exceeds $3,050,000.

Qualified Business Income Deduction

The qualified business income (QBI) deduction allows eligible self-employed and small business owners to deduct up to 20% of their eligible business income on their individual tax returns.

Limits on the deduction begin phasing in for taxpayers with income above $191,950 for single filers ($383,900 for married couples filing jointly)

Tax Credit Adjustments

Adjustments to these tax breaks also impact several tax credits available in 2024. Here are a few that might impact you.

Earned Income Tax Credit (EITC)

The earned income tax credit is a federal tax credit for working taxpayers with low to moderate incomes. The IRS adjusts the maximum credit dollar amounts and the applicable income limits annually for inflation.

The following table shows the EITC credit amounts and income limits for 2024:

Filing Status Title No Children One Child Two Children Three or More Children
Single or Head of Household Income at Max Credit $8,260 $12,390 $17,400 $17,400
Maximum Credit $632 $4,213 $6,960 $7,830
Phaseout Begins $10,330 $22,720 $22,720 $22,720
Phaseout Ends (Credit Equals Zero) $18,591 $49,084 $55,768 $59,899
Married Couples Filing Jointly Income at Max Credit $8,260 $12,390 $17,400 $17,400
Maximum Credit $632 $4,213 $6,960 $7,830
Phaseout Begins $17,250 $29,640 $29,640 $29,640
Phaseout Ends (Credit Equals Zero) $25,511 $56,004 $62,688 $66,819

Child Tax Credit

The Child Tax Credit amount is not adjusted annually for inflation—it remains at $2,000 per qualifying child for tax year 2024.

However, the IRS adjusts the refundable portion of the credit for inflation. If the credit brings your tax liability below zero, up to $1,700 is available as a refund in 2024, up from $1,600 for tax year 2023.

Retirement Contributions

Inflation adjustments also impact retirement contributions. The maximum contribution to 401(k)s, Individual Retirement Accounts (IRAs), and other retirement accounts typically increases, allowing you to save more for retirement in a tax-advantaged way.

Here are the new contribution limits for 2024:

  • 401(k)s: $23,000 (The limit for catch-up contributions for people age 50 and older remains at $7,500)
  • IRAs: $7,000 (The limit for catch-up contributions for people age 50 and older remains at $1,000)
  • Defined contribution plans: $69,000 for total employee and employer contributions

The phase-out range for deducting IRA contributions for people participating in an employer-sponsored retirement plan increased to adjusted gross income (AGI) between $77,000 and $87,000 for single filers ($123,000 to $143,000 for married couples filing jointly).

The phase-out range for contributions to a Roth IRA increased to AGI between $146,000 and $161,000 for single filers ($230,000 and $240,000 for joint filers).

Health Savings Account (HSA) Contributions

If you have a high deductible health plan (HDHP), an HSA offers a tax-advantaged way to pay for out-of-pocket healthcare expenses and grow your retirement savings.

The IRS adjusts HSA contribution limits annually for inflation. For 2024, you can contribute up to $3,850 if you have self-only coverage or $7,750 for family coverage.

The catch-up contribution limit for people 55 or older isn’t adjusted for inflation and remains at $1,000.

Estate and Gift Tax Exemptions

The IRS adjusted two critical thresholds for estate tax planning in 2024.

The lifetime estate and gift tax exemption increased to $12.92 million. This means the estates of taxpayers who die in 2024 with an estate valued at less than this amount do not have to file a federal estate tax return or pay federal estate taxes.

Remember that many states charge estate and/or inheritance taxes and have different exemption amounts.

The annual gift tax exclusion increased from $17,000 to $18,000. This means you can give gifts of money or property worth up to $18,000 to as many people as you want without filing a federal gift tax return or having them count against your lifetime exemption amount.

Planning Ahead

These are just a few adjustments to tax brackets, deductions, credits, and other tax provisions that might impact your tax planning in the coming months.

What can you do with this information now?

  1. Adjust your withholding. Consider adjusting your tax withholdings to account for the new brackets and deductions by completing a new Form W-4 and giving it to your employer.
  2. Boost your retirement savings. Take advantage of increased retirement contribution limits and HSA contributions (if eligible).
  3. Tax planning. Consult with a tax professional to understand how these changes impact your tax situation. Business owners may want to pay special attention to changes in Section 179 expensing limits, the QBI deduction, and how you can use the annual gift tax exemption for estate tax planning.

By staying informed about these changes and working with a trusted tax advisor, you can make smarter financial decisions and potentially reduce your tax bill. Schedule a free consultation with Hood & Associates to see how these changes might impact you in the coming tax year. Remember, a little planning goes a long way in managing your taxes effectively in the face of inflation.

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