The IRS recently released the new inflation-adjusted 2024 tax brackets, and as we enter the new year and tax filing season approaches, it’s important to understand that your tax bill is largely determined by the tax brackets the IRS sets. If you’re a beginner and don’t really understand how tax brackets work, worry not! We’re going to simply explain how the 2024 tax brackets work, and what they mean for your money.
What are Tax Brackets?
A tax bracket acts as a range of incomes subject to a certain income tax rate. Tax brackets are part of what’s called a progressive tax system, in which tax rates progressively increase as a person’s income grows. Meaning, people with lower incomes fall into tax brackets with relatively low income tax rates, while people with higher incomes fall into brackets with higher rates.
Currently, there are seven federal tax brackets in the United States, with rates ranging from 10% to 37%, depending on your income and filing status. Here are the 2024 tax brackets:
| Filing Status | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
|---|---|---|---|---|---|---|---|
| Single | Up to $11,600 | $11,600 – $47,150 | $47,150 – $100,525 | $100,525 – $191,950 | $191,950 – $243,725 | $243,725 – $609,350 | Over $609,350 |
| Head of Household | Up to $16,550 | $16,550 – $63,100 | $63,100 – $100,500 | $100,500 – $191,950 | $191,950 – $243,700 | $243,700 – $609,350 | Over $609,350 |
| Married Filing Jointly | Up to $23,200 | $23,200 – $94,300 | $94,300 – $201,050 | $201,050 – $383,900 | $383,900 – $487,450 | $487,450 – $731,200 | Over $731,200 |
| Married Filing Separately | Up to $11,600 | $11,600 – $47,150 | $47,150 – $100,525 | $100,525 – $191,950 | $191,950 – $243,725 | $243,725 – $365,600 | Over $365,600 |
How Do the 2024 Tax Brackets Work?
Tax brackets might seem extremely complicated at first, but they’re actually quite simple. The most important thing to know about them is: Unless your total income falls into the lowest tax bracket, you are charged at multiple rates according to the additional tax brackets into which your income flows. If this still sounds complicated, here’s an example:
Suppose you get paid $11,600 or less and you’re filing for your taxes individually, then the tax rate on your income is 10% since $11,600 or less is the lowest tax bracket. This would result in paying a tax of $1,160.
Now, let’s say your income falls in the range of $47,150 to $100,525 and your filing status is also single like in the previous example, then you’d fall into the third tax bracket, and your tax rate would be 22%.
A common misconception regarding tax brackets is that if your income falls into a certain bracket, then your entire income is taxed at the rate of that bracket. However, this isn’t the case. In fact, your income will be taxed at what is called an effective tax rate.
Think of it like a ladder, the first step of your income, which is up to $11,600, whether you are an entry-level employee or the CEO, is taxed at 10%, and as your income increases and you take another step up the ladder, it gets taxed at 12% then at 22%, and so on.
If your annual income is $100,525, how much taxes would you pay?
To answer this, you need to know what deductions you can legally claim. Let’s say that your filing status is single, then you’d be entitled to a tax deduction of $14,600. This is the new standard deduction for 2024 and a $750 increase from 2023’s standard deduction. Everyone is eligible for this deduction but it could differ depending on your filing status.
Based on this, you can deduct $14,600 from your $100,525 income, leaving only $85,925 of taxable income. The first $11,600 of your income, aka the maximum income for the first tax bracket, would be taxed at 10%, leaving you with $71,325 in taxable income and $1,160 in taxes.
Then, you’d enter a new tax bracket covering up to $47,150 of your income, which means that $47,150 of the total $71,325 would be taxed at 12%. This leaves $24,175 of taxable income remaining and $5,658 in taxes so far. The remainder of your income would fall into the third tax bracket, and would be taxed at 22% for another $5,318 in taxes.
The total tax you would have to pay is the sum of these three numbers: $1,160, $5,658, and $5,318 for a total of $12,136 on your taxable income of $85,925. This gives you an effective tax rate, which is essentially a blended rate of all the tax rates from the applicable tax brackets. In this case, the effective tax rate is approximately 14%, which is significantly less than the 22% tax rate for an annual income of $100,525.You can find your effective tax rate by dividing the amount of taxes you pay, which is $12,136 in this example, by your taxable income, which is $85,925.
Understanding Your Filing Status
One easy way to save on your taxes is by understanding your filing status, since it can have a massive impact on your tax brackets and standard deductions. There are a number of filing statuses such as filing jointly with your spouse, filing separately with your spouse, or filing as the head of the household. To qualify as the head of a household you have to be an unmarried person with a qualifying dependent.
This qualifying dependent generally needs to be your child or your parents. By filing as the head of the household, you get a higher standard tax deduction of $21,900, compared to to the $14,600 deduction for single filers. Also, married couples who file their taxes jointly receive a higher standard deduction of $29,200.
State Income Tax
This covers federal income 2024 tax brackets, but state income tax is a very different matter. Tax regulations differ from one state to another, with some states even having no state income tax like Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Tax brackets also vary across states, for example, California, Iowa, and Missouri had nine brackets in 2022, while Hawaii had twelve. The tax rates of those brackets also vary considerably.
Ways to Reduce Your Tax Bill
With some of the common misconceptions about tax brackets cleared up, the next step is finding ways to reduce your tax burden. The best methods for reducing your taxes ultimately depends on each individuals’ situation, however there are some common methods for seeking tax relief which are applicable to most people.
Charitable Donations
A charitable donation is a gift of either money or goods to a tax-exempt organization, which can reduce your taxable income. In order to make use of this, you must donate to an IRS-recognized charity and receive nothing in return for your gift. Some examples of organizations you could donate to for tax benefits are religious organizations, the Red Cross, nonprofit educational agencies, museums, volunteer fire companies, and organizations that maintain public parks.
It’s important to make sure that the organization you plan on donating to is IRS-recognized, since some donations don’t count as tax deductions. For example, you can’t receive tax benefits from donating to a friend’s GoFundMe. This isn’t a hard process at all, in fact, you can verify an organization’s status with the IRS Exempt Organizations Select Check tool.
After donating, it’s important to keep track of your donations no matter how small since you’ll need these documents to prove your donation for a tax deduction. Documents like bank statements, credit card statements, or a receipt from the charity are acceptable.
But you still need to keep the deadlines in mind. For your donation to be considered tax-deductible when you file, it must have been made by the end of that corresponding tax year. For example, you have until December 31st, 2024, to make donations you want to claim on your 2024 tax return which must be filed by April 2025.
Generally, you can deduct up to 60% of your adjusted gross income via charitable donations, but you may be limited to 20%, 30% or 50%, depending on the type of contribution and the organization.
Retirement Savings
You can also secure tax deductions by saving for your retirement. Contributions of up to $23,000 to a 401(k) or 403(b) plan in 2024, will reduce your taxable income. For example, if you earn $100,000 annually and contribute $23,000 in 2024 to your 401(k) plan, then this would reduce your taxable income to only $77,500.
If you don’t have a workplace retirement plan, you could still get a tax break by contributing up to $7,000, or $8,000 if you’re 50 or older, to an IRA. The deduction for IRA contributions is phased out for adjusted gross incomes at different levels depending on whether they’re claimed on a single taxpayer’s return, a joint return, or by a married individual filing separately.
The Bottom Line
While this article provides an overview of the current tax bracket structure, its important to note that these tax brackets could change year to year based on inflation. But understanding how the bracket system works and monitoring for updates is crucial for financial planning and budgeting.
It’s important to pay what you legally owe, but understanding the 2024 tax brackets and talking to a tax professional will help you avoid any uncomfortable surprises come tax season. This is doubly so for day traders and investors. Find out how you can avoid day trading taxes and keep more money in your pocket. Whether you are an investor or not, inflation adjustments will push many taxpayers into higher brackets . Even with higher standard deductions, many individuals will feel the impact on their finances.
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