IRS Announces Tax Brackets for Inflation, Offering Potential Relief
The Internal Revenue Service has announced revised income limits for the seven federal tax brackets for the upcoming year, incorporating a 5.4% increase to reflect inflationary pressures. This revision could lead to tax savings for individuals when filing in 2024.
Following the substantial 7% expansion in tax brackets last year due to high inflation rates, the IRS continues to adjust these thresholds based on a consumer price index formula. This annual adjustment aims to mitigate "bracket creep," where inflation-driven income increases can push taxpayers into higher tax brackets without actual improvements in their standard of living.
With the new adjustments, workers may find a larger portion of their income falling into lower tax brackets, providing potential tax relief. These changes will be applicable when taxpayers file their taxes in early 2025.
For the tax year 2024, the IRS has recalibrated the tax brackets for all filing statuses, including single filers and married couples, by approximately 5.4%.
The United States employs a progressive taxation system, with tax rates increasing with higher earnings. The current federal income tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, as established by the 2017 Tax Cuts and Jobs Act.
In this progressive system, each bracket's rate applies only to income within that bracket's range. Consequently, a taxpayer's marginal rate is the highest rate applied to their income, while the effective tax rate represents the actual rate paid across different portions of income.
For example, considering a single taxpayer with a 2023 income of $110,000 and assuming the same tax year's brackets for illustration, this taxpayer would claim a standard deduction of $13,850, reducing taxable income to $96,150. Their marginal rate would be 24%, but the actual, or effective, tax rate is lower. They would pay:
- A 10% tax on the initial $11,000 of income, equating to $1,100
- A 12% tax on income between $11,000 and $44,735, totaling $4,048
- A 22% tax on the slice of income from $44,735 to $95,375, adding up to $11,140
- A 24% tax on the income from $95,374 to their taxable income limit of $96,150, which is $775
The total tax liability would be $17,063, translating to an effective tax rate of 17.7% on their taxable income.