As people settle into the New Year, some may notice a slightly larger paycheck deposited into their account. The Internal Revenue Service (IRS) implemented new federal income tax brackets, allowing some Americans to keep more of their income instead of handing it over to the government. Brackets were adjusted 5.4% higher for married and individual filers to account for inflation.
Each year, the IRS adjusts the standard deduction, personal exemptions, tax brackets, and other tax credits to consider changes in the cost of living. Therefore, if your income is around the same as the prior year, and depending on your withholding, you could see a moderate increase. To determine if your income will be higher, check your withholding using the tax withholding estimator available on the IRS website.
The reason for the bracket adjustment
The bracket adjustment was considered to avoid what is known as “bracket creep.” Bracket creep occurs when inflation pushes people into a higher tax bracket. Still, the higher tax bracket doesn’t mean a higher income, and their purchasing power remains the same as before, creating financial stress.
Regularly review withholding status
It is beneficial to check your withholding when:
· The tax law changes.
· Early each year.
· If there are changes you have experienced in your life, including:
o The birth or adoption of a child, marriage or divorce, purchasing a home, retirement, or filing Chapter 11 bankruptcy.
o Your financial situation may have evolved and changed your itemized deductions or tax credits like interest expenses, medical expenses, gifts to charity, child tax credits, earned income credits, and education credits.
o Specific taxable income not subject to withholding, such as capital gains, IRA (including specific Roth IRA), interest income, self-employment income, and dividends.
o Income change, for example, you or your spouse starts or stops working their primary job or starts or stops a second job.
o Income adjustments include student loan interest deduction, alimony expense, and IRA deduction.
Increase in the standard deduction
The standard deduction is the portion of your income not subject to federal income tax. Taxpayers typically have the choice of claiming the standard deduction or itemizing their deductions. The standard
deduction for married couples filing jointly for tax year 2024 rises to $29,200, an increase of $1,500 from tax year 2023. For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600 for 2024, an increase of $750 from 2023. For heads of households, the standard deduction will be $21,900 for 2024, an increase of $1,100 from the amount for 2023.
Consult your financial professional
Taxes, just like life, are complicated and continuously changing. We lead hectic lives, and it takes time and effort to stay updated with everything and then determine how the changes will impact our financial decision-making. Consider consulting a financial professional to work towards making your money work for you and aligning your strategy with your financial goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources: IRS 2024 tax bracket changes may make your paycheck slightly bigger (cnbc.com) Standard Deduction in Taxes and How It's Calculated (investopedia.com) Does Inflation Reduce Your Taxes and Increase Tax Breaks? | Kiplinger
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