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  • Writer's pictureMichael Trout

A guide to 2024 Tax Brackets

Let’s face it: The US tax code isn’t exactly easy to understand.

Taxpayers frequently are befuddled by how their income taxes are calculated, leading them to wonder why they are hit with a higher-than-expected tax bill.

But with even a rudimentary understanding of the 2024 tax brackets, you can make better decisions about retirement contributions, deductions and credits, and even whether to recognize income in one tax year versus the next.

2023 versus 2024 tax brackets

The Internal Revenue Service (IRS) has designated seven federal tax brackets that apply to both the 2023 tax year (the taxes you file in April 2024) and the 2024 tax year (the taxes you file in April 2025): 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The IRS occasionally adjusts income thresholds to account for inflation and changes in tax laws. These adjustments not only affect your tax brackets but deductions, credits and contribution limits for retirement accounts as well.

For the 2023 and 2024 tax brackets, the IRS is keeping tax rates the same. However, there will be some other changes to federal taxes for the 2024 tax year, which are due in April 2025. For example, income thresholds will be increasing for tax year 2024.

Here’s how the rates compare from year to year based on a taxpayer’s filing status:

How income tax brackets work

The federal government uses tax brackets as a way of structuring income tax rates progressively. The intention is to distribute the tax burden so that higher-earning taxpayers pay a greater percentage of their income in taxes compared to lower earners. Congress has consistently deemed that to be more fair than a flat tax.

Chad Cummings, a certified public accountant (CPA) and attorney in Naples, Florida, said it can be helpful to think of income tax brackets like steps on a staircase.

“As you earn more money, you climb higher on the staircase. Each step represents a tax bracket with a specific tax rate,” he said. “The more money you make, the higher the step you reach, and different portions of your income are taxed at the rates corresponding to each step you’ve passed.”

Extending that analogy, only the money that lands on a higher step gets taxed at the higher rate, not all of your income.

Believing all one’s income is taxed at the higher rate is a common misconception among taxpayers, Cummings added.

State tax brackets vary. Some states use the same brackets as the federal government; others have their own systems. For example, California tax brackets for 2023-2024 are similar to IRS brackets, although California has nine brackets ranging from 1% to 12.3%.

Understanding marginal and effective tax rates

Your marginal tax rate refers to the percentage paid on the last dollar you earned, while your effective tax rate indicates your overall tax burden as a percentage of total income, including deductions and credits.

The marginal tax rate, Cummings said, is the tax rate paid on the last dollar a taxpayer earns.

“It’s essentially the tax rate of your highest tax bracket, or the last step you’ve reached on the tax staircase,” he said. “It shows how much tax you’ll pay on additional income.”

The effective tax rate is the average rate you’ll pay on your total income.

Returning to the staircase imagery, Cummings said, “Imagine you poured a bucket of water — your income — on the top step of the staircase, and it cascaded down the steps or tax brackets. The effective tax rate would be the overall percentage of your bucket that got spilled on the stairs as tax, taking into account all the different rates on each step.”

Tax brackets for different filing statuses

Tax filing status defines how an individual or household reports income and eligibility for certain tax benefits.

Filing options include single, married filing jointly, married filing separately, head of household and qualifying widows and widowers.

The IRS defines qualifying widows or widowers as “taxpayers who do not remarry in the year their spouse dies.” A qualified widow or widower can file jointly with the deceased spouse for the two years following the year of the spouse’s death.

“There used to be a marriage ‘penalty’ where two single brackets would pay less taxes than a couple in a married bracket,” said Caitlynn Eldridge, founder of Eldridge CPA in Bellevue, Nebraska.

That’s no longer the case, she said.

According to tax preparer H&R Block, the Tax Cuts and Jobs Act of 2018 essentially put an end to the marriage penalty by updating most of the tax brackets for the married filing jointly status to be exactly double the size of the single filing status brackets.

Additionally, tax brackets for married filing separately taxpayers were updated to generally match the tax brackets for single filers.

There’s also the head of household status, which refers to an unmarried person who can claim a child or other relative as a dependent. The tax bracket is roughly halfway between the single and married filing joint statuses.

“The idea here is that if you are a single parent raising kids, we should give you a more advantageous tax situation to better support your family,” said Eldridge.

Below are the 2023-2024 tax brackets from the IRS that offer an easy way to estimate your tax brackets and rates at a glance.

Tax year 2023

For tax year 2023, or the taxes you file in April 2024, these are the tax brackets and income thresholds for the various filing statuses:

Tax year 2024

For tax year 2024, or the taxes you file in April 2025, these are the tax brackets and income thresholds for the various filing statuses:

How your income is calculated for tax purposes.

If you receive a Form W-2 from your employer, don’t overlook other sources of income when you calculate your taxes.

“Your taxable income isn’t just your salary,” said Paul Miller, a CPA and founder of Miller & Company in New York, New York.

Miller pointed out that income includes various sources, such as wages, salaries, tips, self-employment earnings and investment gains.

Other, less common items to include in your income calculations for taxes may include gambling winnings, forgiven debts, bartered goods or services, rental income, cryptocurrency gains, jury duty pay and unemployment compensation, among others.

Not all income is necessarily subject to taxation, Miller said.

“There are deductions, adjustments and credits available to help lower your taxable income, such as contributions to retirement accounts or expenses related to homeownership or education,” he said.

Methods to reduce taxes owed

Although pretty much everyone grumbles about the bill that’s due in April, US taxpayers are fortunate to have several ways of reducing that amount.

Colleen Carcone, director of wealth planning strategies at TIAA in Boston, Massachusetts, said taxpayers should prioritize reducing income and increasing deductions.

“Working with a financial planner and tax professional can help you to do both,” she said. “For example, most of us would agree that we do not want to take a smaller paycheck home just to cut our tax bill, but there are strategies that we can all take advantage of.”

Maximizing contributions to tax-deferred accounts, such as 401(k) plans, individual retirement accounts (IRAs) or health savings accounts (HSAs) can significantly reduce your taxable income while you’re also saving for retirement.

“Many of us are in a much higher tax bracket while we are working than we will be once we retire,” Carcone said. “Contributions to tax-deferred accounts generally reduce your income, the contributions grow tax-deferred and, when you take the funds out during retirement, you might be in a lower income tax bracket.”

Also, consider the tax efficiency of your investments.

Investment income, Carcone said, includes capital gains, interest and dividends, all of which are taxable. It’s often useful to work with a tax consultant or financial advisor to optimize your tax and withdrawal strategies.

Another tax-reduction strategy is tax-loss harvesting, or selling an investment with a capital gain simultaneously with selling an investment with a loss, to create a net capital gain of zero, or as close to it as you can get.

Carcone also said itemized deductions, such as charitable contributions, are another area where taxpayers can reduce income if they strategize.

“In this online world where we can click a button and make charitable gifts using our credit card, many simply do that because it is easy,” she said. “But there may be more efficient ways to make charitable gifts.”

For example, if you have a share of stock that you purchased for $1 that is now worth $100, you can give a share of that stock to your favorite charity, deduct the $100 from your income tax return and avoid paying a capital gains tax.

“If I sold that stock, however, I would have to pay a capital gains tax on the $99 gain,” Carcone pointed out.

Alternatively, for taxpayers over age 70 1/2, using traditional IRAs to make charitable gifts can be a smart strategy.

“When you take money out of your IRA, you have to pay income tax on those distributions. But if you direct monies from your IRA to your favorite charity, the amount you give reduces your required minimum distribution amount, and it reduces the portion of your distribution that is taxable,” Carcone explained.

Historical overview of tax brackets and rates

US tax brackets and rates have changed significantly over the years, although the concept of progressive taxes that charge higher rates on higher incomes has largely remained.

“Did you know, in 1964, if you made over $25,000, anything over $25,000 was taxed at 50%? We’ve had much, much higher tax brackets in the past and often didn’t differentiate for different types of income like we do today, such as capital gains,” said Eldridge.

Over the years, US tax brackets and rates have changed, often using inflation as a starting point for making changes.

“No one is ever fully happy with their bracket, and often we forget that this is just income tax; we still pay sales taxes, real estate taxes, Social Security and Medicare taxes,” said Eldridge. “So while the income tax rate might not look high, people get very worn out seeing taxes everywhere else in life.”

Source: | CNN


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