2024 Tax Changes: Brackets, Credits & Important Considerations

The IRS recently announced some important changes to federal tax brackets, credits, and the standard deduction that could affect how much tax you end up paying for this year.

In this blog, we review the most important changes in the IRS’s rules and how these are likely to affect your tax liabilities in the future.

Brackets, Credits, and Deductions: IRS Tax Rules 2024

The Internal Revenue Service (IRS) has rejiggered its federal tax brackets for 2024. These brackets have nothing to do with March Madness and everything to do with how much tax will be deducted from your paycheck this year.

The IRS has also updated rules about the standard deduction you can claim on the 2024 tax return you submit in April 2025, as well as the child tax credits you may receive on earned income and certain tax exclusions.

The good news is that some of these changes might actually work in your favor, especially if you are just starting out in your career or you did not receive a large salary increase last year. Below we review each of these changes and how they are likely to affect your income in 2024.

Federal Tax Brackets and Rates

The federal government levies income tax progressively, meaning that those who earn less will pay less than those who earn more. Tax brackets are essentially the steps in your income at which a higher tax rate is levied on the part of your income that extends into that bracket.

This year, the IRS has decided to readjust its brackets to account for the very real effect that high inflation has had on your paycheck over the last couple of years.

If it did not do this, any marginal cost-of-living increase you may have received might push you into a higher tax bracket, meaning you would suddenly need to pay more tax without any real increase in income.

Overall, the IRS has adjusted the brackets by about 7% although the actual taxation rates do not change. The following tables show the range for tax brackets 2024 compared with 2023 for those filing singly and couples filing jointly.

Marginal vs. Actual Tax Rate

However, only the portion of your income that extends into the higher bracket is taxed at that rate. It’s rather like a line of buckets that overflow into one another as they fill up. In each case, your marginal tax rate is the amount that overflows into each successive bucket. Your actual tax rate is the combined tax rate you pay on the amount in each tax “bucket.”

What Does This Mean for You?

If you received no salary increase or one benchmarked against the cost of living in your area, it might mean a little more money in your pocket each month as your monthly income is taxed slightly less. It’s also important to keep the new bracket limits in mind if you are changing jobs, retiring, or negotiating a raise this year.

For example, if you are a single filer earning $88,000 your tax rate in 2024 will drop from 22% to 12%. However, accepting an annual pay raise as small as $125 per month could see you remain in the higher tax bracket, paying almost twice as much tax.

As a married couple, it’s also worth looking at whether it pays to file jointly or singly under the new rules. You might find you pay less tax individually than combined, especially if a smaller income tips the larger one over into a higher bracket.

Standard Deduction Adjustments

Ordinarily, the IRS tried not to adjust bracket rates because of the potentially dramatic effect on taxation of your salary or fixed income. Instead, the Feds usually adjust a range of other rules.

Most important among these is the standard deduction. This is the set amount of income that you're allowed to deduct from your taxable income, “no questions asked,” rather than itemizing all the expenses that you believe might qualify for exemptions.

The standard deduction is designed to make filing (and processing) your taxes simpler, without the need to track any expenses that would ordinarily be covered by the standard deduction.

The rate is adjusted to cover the typical estimated expenses of people, whether they be single, married and filing jointly or separately, or the head of a household (for single filers with significant financial obligations).

The IRS adjusts the standard deduction most years to try to stop inflation pushing people into a higher tax bracket and 2024 is no exception. Here’s how it breaks down.

What Does This Mean For You?

The changes mean you will be able to write more of your taxes off without having to itemize expenses that may qualify for specific exemptions. That, in turn, means more money in your tax refund if you choose not to apply for other exemptions.

The standard exemption makes completing your tax return much easier. However, it’s important to remember the many types of income and expenditure that may qualify for exemptions in your case. These include:

• Mortgage and student loan interest

• Health insurance premiums and medical expenses

• Home office and other business expenses

• Certain IRA contributions and disbursals

• Charitable contributions and certain kinds of gifts

If you believe you have spent more in total on these exemptions or others, then you might be able to deduct more from your taxes if you itemize these expenses in your return.

New Social Security Tax Limits

A small but important change is an increase in the amount of income going toward social security contributions, which rises to $10,453 on a maximum taxable income of $168,000 (up from 160,200 in 2023). That means the social security tax limits for 2024 amount to a 6.2% matched tax rate for both employee and employer or a total of 12.4% of an employee’s income.

What Does This Mean for Me?

This can be significant if you were earning more than $160,200 in 2023 and now earn less than $168,000 in 2024. In this scenario, you may see your tax bill increase. Remember, however, that your higher income base will benefit you when it comes time to calculate your social security benefits. If you earn less than 168,000, you are already being taxed for social security.

The Earned Income Tax Credit

Tax credits allow selected taxpayers to apply certain out-of-pocket expenses to their tax bills. They are usually meant to help certain groups, such as lower-income families or parents who face significantly higher expenses in a particular area.

The Earned Income Tax Credit is available to a wide range of lower-income taxpayers based on the number of children and household earnings. Benefits phase out as family income increases.

For 2024, the IRS has increased the maximum Earned Income Tax Credit to $7,830 for qualifying taxpayers with three or more qualifying children, which is up from $7,430 in 2023.

The Child Tax credit, a similar existing provision that applies to families with higher income levels, was expanded during the COVID-19 pandemic as childcare costs soared. However, the IRS has left the Child Tax Credit 2024 unchanged from 2023 at $2,000 per qualifying child.

What Does This Mean for You?

The Earned Income Tax Credit increase is important if you are a lower-income tax-payer with a large family. You can now claim an additional $400 in expenses against your credit. If your total tax bill is lower than $7,830, you should receive the difference as a tax refund.

Other Changes

Along with this targeted tax credit, the IRS also adjusted several other restrictions and exclusions to account for the effect of inflation on taxpayers’ finances. These include:

Health Flexible Savings Accounts

To help taxpayers manage already high uninsured medical expenses, the IRS has raised the maximum contribution limit deductible from salaries for dedicated Health Flexible Savings Accounts (FSAs) in 2024 to $3,200.

Medical or Health Savings Accounts

For taxpayers with their own medical or health savings accounts (HSAs), often linked to health insurance plans, the annual maximum deductible for single-owner accounts has been raised to $4,150 from $3950 in 2023, and to $8,350 from $7,750 for family accounts.

Estates and Gift Tax Exclusion

The IRS has also changed the amount of money you can exclude from taxation as part of the estate of a deceased person to $13.6 million from $12.92 million previously.

Meanwhile, the amount of money you can give as a gift to another person has increased by $1,000 to $18,000 per year.

What Does This Mean for Me:

Larger contributions to FSAs and HSAs help these investments keep up with inflation. That may affect your ability to afford medical treatment and can be very important if you have significant medical issues.

The estate tax increase is relevant only if you inherit a large amount of money in 2024, in which case you can expect to receive a bit less than you would have before. However, the increase in the gift tax is very helpful if you hope to make or receive a large gift in 2024, for example, to assist with a major purchase such as a down payment on a house.

Put Your Tax Savings to Work

Remember, the changes we have discussed here affect your return for the 2024 tax season. When is tax season 2024? You need to file your 2024 tax return by April 15, 2025, so essentially January 1, 2025 is the official opening of the 2024 tax season.

The good news is that readjusted tax brackets, a higher deductible, and more generous tax credit may put additional money in your pocket right now! While it’s tempting to treat that extra cash as a windfall, it’s also a great opportunity to build your overall financial wellness. You can do this by:

• Starting an emergency fund

• Building an overdraft buffer

• Setting aside money for a dream purchase

• Start saving for college or retirement

At Listerhill Credit Union, we offer our members all the tools they need to achieve more with the money they have, from our Growth Checking, My Goal Savings, Good Start, and Explorer Rewards accounts, to our structured Money Market, Certificate, and IRA products.

Please reach out to a Member Advocate for help with accounts that might help you take advantage of tax savings.

Contact Listerhill Credit Union