The word “inflation” makes most of us shudder, but what if we told you that it could be good news when it comes to your taxes?
The IRS announced new income limits for its seven tax brackets in 2024. The 5.4% boost was created because the consumer price index, which tracks the costs of consumer goods and services, rose significantly in 2023 due to high inflation.
Looking ahead to next year, a shift occurs with more income falling into lower tax brackets. For example, in the 2023 tax year, single tax filers face a 10% tax on the first $11,000 of taxable income. In 2024, the initial $11,600 of taxable income falls into the 10% bracket, leading to an additional $600 being taxed at 10%, as opposed to the current year’s 12%.
But why is this happening, and what does it mean for you and your family?
Why? To potentially lighten the tax load for some in the year ahead. The changes are good news for taxpayers as they gear up for the 2024 filing season. The intention is clear: to prevent the notorious “bracket creep.” This phenomenon occurs when workers find themselves pushed into higher tax brackets due to cost-of-living adjustments or salary increases, even if their standard of living remains relatively constant.
How will it impact you? With a 5.4% inflationary increase to the federal income brackets, bracket management strategies should be reviewed for most taxpayers. Some strategies to consider include:
- If you’re a retiree: There may be a small window to increase IRA distributions and remain in the same tax bracket. If you’re aged 55 and above, you can still contribute an extra $1,000 to your Health Savings Accounts.
- If you’re a high-net-worth individual: Every dollar that can be deferred from the 37% bracket has a tax benefit.
- If you’re a business owner: If you have a pass-through entity, such as an S Corp. or an LLC, qualifying for the s.199A deduction has provided a 20% additional benefit over the last few years.
- For healthcare expenses: The IRS is raising limits for tax-advantaged accounts for healthcare expenses. Flexible spending accounts, covering short-term health costs with pre-tax dollars, will have a 2024 limit of $3,200, up from $3,050. HSAs will see a 7.8% increase to $4,150 for singles and a 7.1% increase to $8,300 for families in 2024.
Inflation and tax bracket changes can feel overwhelming. Remember: You aren’t in this alone. If you are curious about these changes, or if you would like to take a closer look at any of these strategies, simply click reply to this email so we can set up some time to talk.
M. Kent Welborn, CFP®, CEPA®, AEP®, CLU®
Principal Business Planning & Wealth Management Advisor
602-813-0202 | [email protected]
Investment advice offered through Integrated Partners, doing business as Welborn Financial, a registered investment advisor.
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