The Internal Revenue Service (IRS) has announced that it will be adjusting the income limits for its seven tax brackets in 2024. This adjustment aims to account for the impact of inflation and could potentially offer some taxpayers a break on their taxes.

The tax agency revealed that it will be increasing the tax brackets by 5.4%, based on a formula linked to the consumer price index. This index tracks the costs of goods and services commonly purchased by consumers. The adjustment comes after the IRS had expanded the tax brackets by a historically high 7% the previous year, reflecting the significant inflation experienced at the time.

The annual adjustment of the tax brackets by the IRS, as well as other provisions like retirement fund contribution limits, serves to counter the effects of inflation. It helps prevent "bracket creep," which occurs when workers are pushed into higher tax brackets due to cost-of-living adjustments or raises despite their standard of living remaining the same.

One potential benefit for taxpayers is the possibility of more of their taxable income falling into a lower tax bracket due to the higher thresholds. This can result in a reduced tax burden. Taxpayers will file their 2024 taxes in early 2025.

The IRS has increased each type of tax filer's tax brackets by approximately 5.4% for 2024, including those who file separately or as married couples. The seven federal income tax rates established by the 2017 Tax Cuts and Jobs Act are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

It is important to note that taxation in the United States is progressive, meaning that tax rates increase with income. However, the misconception that workers pay the highest tax rate on their entire income is not accurate. Each tax rate is applied to the income that falls within the respective bracket.

The standard deduction will also see a 5.4% increase in 2024, according to the IRS. For married couples filing jointly, the new standard deduction will be $29,200, a $1,500 increase from the previous tax year. Single taxpayers and married individuals filing separately will have a standard deduction of $14,600, a $750 increase. Heads of households will have a standard deduction of $21,900, a $1,100 increase.

Taxpayers can determine their marginal tax bracket by calculating their highest taxable income. For example, a married couple with a gross income of $150,000 would subtract the 2024 standard deduction from that amount, leaving them with a taxable income of $120,800. This places their marginal tax rate at 22%. However, their effective tax rate would be lower, with a combined federal income tax payment of $16,682, resulting in an effective tax rate of approximately 14%.

Overall, the adjustments made by the IRS to the tax brackets and standard deduction for 2024 offer potential tax relief for certain taxpayers. These changes, based on measures to account for inflation, aim to ensure fairness and prevent "bracket creep" in the progressive tax system of the United States.