Taxes 2024: 4 Upcoming Tax Law Changes
Tax Year 2024 will likely bring some surprises, but some of its changes are already planned. Here's what you need to know about some of the planned phase-outs, changes and inflation adjustments the IRS will present for taxes in 2024.
Planning for change
Planning your finances provides several benefits. First and foremost, proper financial planning allows you to identify adjustments you can make to better prepare for the future. While no amount of planning can perfectly prepare you for what lies ahead, it can certainly give you the flexibility to respond appropriately.
Knowing about certain upcoming tax changes can lay the groundwork for planning your year ahead. As the new year begins, many people will want to understand which taxes will change in 2024 and what provisions will phase out or be adjusted for inflation. Here's a high-level summary of some of the items that will change for taxes in 2024.
1. Adjustments for inflation
As the prices of the goods and services we buy gradually go up over time, typically, so do our incomes. If the income tax system did not account for this expected change, income taxes would often grow at a faster rate than incomes, likely causing unexpected financial stress. The income taxes assessed in 2024 are no different. Income tax brackets, eligibility for certain tax deductions and credits, and the Standard Deduction will all adjust to reflect inflation.
For most married couples filing jointly their Standard Deduction will rise to $29,200, up $1,500 from the prior year. For most single taxpayers and married couples filing separately, the Standard Deduction rises to $14,600, or half that of married filers. Most taxpayers filing as Head of Household will see their Standard Deduction increase to $21,900.
2. Planned tax increases for 2024
As mentioned previously, income tax brackets, eligibility for certain deductions and credits, and the Standard Deduction will all see increases in 2024 on account of inflation. One change made since the Tax Cuts and Jobs Act became law, though, is how the tax code calculates inflation.
Namely, instead of tying inflation to the traditional consumer price index, tax reform now measures inflation using something called "chained" CPI.
Essentially, this new figure measures inflation in a different, often slower way that accounts for consumers' tendency to shy away from items that undergo a large price increase. For taxpayers, this means they could more easily get pushed into a higher marginal tax bracket than before tax reform because of cost-of-living paycheck increases or annual raises that outpace the chained CPI.
3. Deductions and credits phaseout adjustments
In line with the adjustments for inflation, many tax deductions and tax credits will have their phaseouts adjusted to account for these changes. Some phaseout changes to note are:
- Earned Income Tax Credit: The maximum credit for filing jointly as a married couple and claiming three or more qualifying dependents amounts to $7,830 in 2024, with the credit completely phased out at $66,819 of adjusted gross income (AGI). If you are a Single filer with no dependents, you can receive a maximum credit of $632 with your phaseout beginning at $18,591 of AGI.
- The Alternative Minimum Tax: Higher exemptions and income phaseouts will occur in 2024. See below for more details.
- IRA contributions: Contribution amounts remain the same in 2024, but phaseout levels for taking deductions for these contributions increase as follows:
- For active participants in employer retirement plans, phaseout for making individual retirement account (IRA) contributions will occur at AGIs between $77,000 and $87,000 for Single and Head of Household filers, $123,000 and $143,000 for joint returns.
- For those with IRAs who do not actively participate in another plan, but their spouse does, phaseout will now range from $230,000 to $240,000 for those that are Married Filing Jointly. For those filing as Married Filing Separately, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 to $10,000.
- Phaseouts do not apply if neither the taxpayer nor the spouse has a workplace retirement plan.
4. Planned changes to the alternative minimum tax
Congress designed the Alternative Minimum Tax (AMT) to keep wealthy taxpayers from using too many tax credits, deductions, and other loopholes to avoid paying taxes.
Because the AMT's exemptions did not automatically update for inflation, an increasing number of middle-income taxpayers got hit with the AMT until a permanent, annual update got put in place starting in 2013. Now, the AMT exemption amount automatically adjusts with inflation, allowing many taxpayers to avoid the tax.
In 2024, these amounts will change to $85,700 with phase out beginning at $609,350 ($133,300 for married couples filing jointly with a phase out beginning at $1,218,700).
Taxes 2024: Start planning now
With these tax changes in 2024, you can take advantage by planning now. Don't let opportunities like contributing more toward your retirement plan or participating in a health savings account pass you by. Contributing to these accounts can save you money for needs you have down the road and lower your tax bill today, no matter what 2021 brings.
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