The Internal Revenue is making a number of changes for tax year 2024, largely as annual inflation adjustments. Looking ahead, some planning in advance can help get you ready to realize the most advantageous tax outcome.
Tax Brackets for 2024
The IRS put in place higher limits for federal income tax brackets for tax year 2024, which means Americans will likely pay a little less in taxes. Brackets are increasing by about 5.4% for both individual and married filers. The top tax rate remains at 37% for 2024, and that starts for single taxpayers earning $609,350 of more.
The IRS made the changes to avoid “bracket creep,” when inflation pushes people into higher tax brackets without additional purchasing power.
Standard Deduction
The 2024 tax year standard deduction for married couples filing jointly will be $29,200, a $1,500 increase from $27,700 for the 2023 tax year. For single taxpayers, the standard deduction is $14,600, an increase of $750 from the 2023 deduction of $13,850. For heads of households, the standard deduction will be $21,900, an increase of $1,100 from the amount for tax year 2023.
IRA, 401(k) Contribution
For tax year 2024, taxpayers can contribute up to $23,000 into 401(k), 403(b) and most 457 plans, $500 more than the $22,500 contribution limit for 2023. The limit on annual contributions to an IRA will increases to $7,000, up from $6,500 for 2023.
The IRA catch-up contribution limit for individuals aged 50 and over remains at $1,000 for 2024. For 401(k) and most other plans, the catch-up contribution limit for employees 50 and over is $7,500 for 2024.
Flexible Spending Account Contributions
The IRS raised the limit for 2024 contributions to health flexible spending arrangements to $3,200, up from $3,050 for 2023. The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,200. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $640, an increase of $30 from taxable years beginning in 2023.
Child Tax Credit
For the 2024 tax year, the child tax credit remains at up to $2,000, but the refundable portion of the credit increases to $1,700, which equates to a possible additional refund of $100 per qualifying child. It’s important to note that income limits apply to these benefits
The maximum credit allowed for adoptions for tax year 2024 is the amount of qualified adoption expenses up to $16,810, increased from $15,950 for 2023.
Electric Vehicle Credit Change
Some models of electric vehicles will lose eligibility for consumer tax credits. This is because of stipulations that prevent crediting vehicles made with components that come from “foreign entities of concern,” such as companies tied to the governments of China, Iran, North Korea or Russia.
However, consumers will now be able to get their tax credit as an instant rebate in the year when they purchase the vehicle, instead of claiming it the following year on their taxes.
Earned Income Credit
The IRS is increasing the earned income tax credit, with families now eligible to receive $7,830 if they have 3 or more qualifying children, an increase of from $7,430 for tax year 2023. You should consult a tax advisor for information related to maximum EITC amounts, income thresholds and phase-outs.
Standard Mileage Rate
The Internal Revenue Service is increasing the “optional standard mileage rate” used to calculate business tax deductions by 1.5 cents a mile for 2024, bringing the IRS rate to 67 cents per mile driven for business use in 2024. The mileage rate for medical miles driven is 21 cents per mile and the rate for charitable miles driven is 14 cents per mile for 2024.
Alternative Minimum Tax
The Alternative Minimum Tax exemption amount for tax year 2024 is $85,700 and begins to phase out at $609,350 ($133,300 for married couples filing jointly for whom the exemption begins to phase out at $1,218,700).
For comparison, the 2023 exemption amount was $81,300 and began to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption began to phase out at $1,156,300).
Gift Exclusion
The annual exclusion for gifts is $18,000 for calendar year 2024, increased from $17,000 for calendar year 2023.
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