Inflation can significantly impact many aspects of daily life, including taxes. The IRS periodically makes adjustments based on inflation to ensure fairness and maintain purchasing power. These changes encompass various tax provisions that can influence your financial plans and obligations. 

Here’s an overview of the significant updates and adjustments in tax brackets, deductions, and exemptions for 2024.

What Is Inflation?

Inflation is the sustained increase in an economy’s goods and services price level over a while. This means your money buys less over time, and your purchasing power diminishes. To address this, the IRS routinely adjusts various tax provisions to reflect the changing economic landscape. Inflation adjustments aim to maintain the value of deductions, exemptions, and tax brackets. This ensures that inflation-induced income growth does not penalize taxpayers.

Tax Changes for 2024

The IRS Revenue Procedure 2023-34 has outlined a series of adjustments that will come into play in 2024. Here are some of the key points:

1. Standard Deduction

The standard deduction is a flat amount you can subtract from your taxable income. This alternative to itemizing deductions allows taxpayers to deduct specific expenses on their tax returns. The IRS revises these amounts annually to ensure there’s no unfair burden on taxpayers. The deduction for married couples who file jointly has risen to $29,200, up by $1,500 from tax year 2023. Single taxpayers and married individuals (who file separately) can now claim $14,600. This marks a $750 increase from last year. Finally, there is a $1,100 increase in claim amount for heads of households.

2. Tax Brackets

Individuals will pay a lower tax rate on a larger portion of their income based on the adjusted brackets. IRS hasn’t changed the top marginal rate of 37%. This applies to individual taxpayers with revenues exceeding $609,350 ($731,200 for married couples filing jointly). Instead, the agency has raised the income thresholds for various tax brackets. These additional brackets, ranging from 10% to 35%, cater to different income levels. This allows more people to avoid the higher tax rates.

3. Alternative Minimum Tax (AMT)

The 2024 tax year’s AMT exemption is $85,700. The phase-out starts at $609,350 for single individuals and $133,300 for joint married couples. It’s important to note that the exemption only begins to phase out at $1,218,700 for couples. This marks an increase from the previous exemption amount of $81,300. In addition, the phase-out started at $578,150 and $126,500 in 2023. The increase in exemption helps more taxpayers avoid paying this alternative minimum tax.

4. Earned Income Tax Credit (EITC)

EITC is a refundable tax credit for low-income workers meeting specific eligibility requirements. It can help supplement their earnings and provide financial assistance. The IRS has increased the maximum EITC amount for qualifying taxpayers with three or more qualifying children to $7,830 in 2024. This is a $7,430 increase from the 2023 tax year. 

5. Additional Tax Provisions

Beyond the significant changes mentioned above, the IRS has adjusted several other tax provisions for 2024. These include:

  • Qualified Transportation Fringe Benefits: Fringe benefits include employer-provided transit passes, vanpooling expenses, and qualified bicycle commuting reimbursements. The monthly limit for these benefits has risen by $15 to $315.
  • Health Flexible Spending Arrangements (FSA): Health FSAs allow employees to set aside pre-tax dollars for qualified medical and dental expenses. The salary reduction limit for contributions has increased to $3,200. Additionally, the maximum carryover amount for cafeteria plans with carryover provisions will rise to $640. This helps you roll over and use more unused funds the following year.
  • Medical Savings Accounts (MSAs): Participants with self-only coverage must have an annual deductible of at least $2,800 from $2,750 in 2023. The maximum out-of-pocket expense has also increased to $5,550. The yearly deductible is now $5,550 for family coverage. This is with a maximum out-of-pocket expense amount of $10,200.
  • Foreign Earned Income Exclusion (FEIE): This provides tax relief for U.S. citizens and residents who work abroad. This exclusion has increased to $126,500 from $120,000 in 2023. This allows you to earn a higher income tax-free while living and working outside the United States.
  • Estates of Decedents: The basic exclusion amount for estates of decedents who die in 2024 will be $13,610,000. This means estates valued below this amount are exempt from paying federal estate tax. This increase allows you to pass wealth on to your heirs without significant tax burdens.
  • Annual Gift Exclusion: The annual exclusion for gifts made to individuals has increased to $18,000 per recipient in 2024, up from $17,000 in the previous year.
  • Adoption Credit: The maximum credit allowed for adoptions is $16,810 for 2024. This tax credit helps offset the expenses associated with adopting a child, making it more financially accessible for families to welcome children through adoption.

Unaffected Items

While the IRS adjusts many tax provisions for inflation, certain items remain unchanged for the coming year. The personal exemption remains at $0, as it has been since the Tax Cuts and Jobs Act of 2017. There is no limit on itemized deductions, another provision implemented by the 2017 Tax Cuts and Jobs Act. In addition, the modified adjusted gross income remains unchanged. This income level determines the Lifetime Learning Credit reduction.

As the next tax year approaches, you must consider the new inflation adjustments and tax changes. This can help you make informed financial decisions and maximize your tax benefits. At Exact Tax Inc., we have a team of experienced and knowledgeable tax experts ready to help you navigate these changes and make informed decisions about your financial future. Book a consultation for individual and business tax preparation!