Understanding the IRS Tax Inflation Adjustments for Tax Year 2024

Introduction

The Internal Revenue Service (IRS) has announced significant changes for the 2024 tax year, impacting various tax provisions due to inflation adjustments. These adjustments, which are detailed in the IRS’s Revenue Procedure 2023-34, are designed to reflect the changes in the economy and ensure that taxpayers are not unduly burdened by inflation. This article delves into these adjustments, providing a comprehensive overview for individuals and businesses preparing for the upcoming tax year. For more detailed information, please refer to the IRS’s official announcement.

Key Changes in Standard Deductions

For Married Couples Filing Jointly

• The standard deduction has risen to $29,200 for 2024, a $1,500 increase from 2023.

For Single Taxpayers and Married Individuals Filing Separately

• The standard deduction is now $14,600, up by $750 from 2023.

For Heads of Households

• The standard deduction is set at $21,900, a rise of $1,100 from the previous year.

Marginal Tax Rates Adjustments

The tax year 2024 sees adjustments in marginal rates, with the top tax rate remaining at 37% for individual single taxpayers earning above $609,350, and married couples filing jointly earning over $731,200. Other rates are adjusted as follows:

• 35% for incomes over $243,725 (individuals) and $487,450 (married filing jointly)
• 32% for incomes over $191,950 (individuals) and $383,900 (married filing jointly)
• 24% for incomes over $100,525 (individuals) and $201,050 (married filing jointly)
• 22% for incomes over $47,150 (individuals) and $94,300 (married filing jointly)
• 12% for incomes over $11,600 (individuals) and $23,200 (married filing jointly)
• 10% for incomes of $11,600 or less (individuals) and $23,200 or less (married filing jointly)

Alternative Minimum Tax (AMT)

For 2024, the AMT exemption amount is set at $85,700, starting to phase out at $609,350 ($133,300 for married couples filing jointly, phasing out at $1,218,700). This represents an increase from the 2023 exemption amount of $81,300, which began phasing out at $578,150 ($126,500 for married couples filing jointly, phasing out at $1,156,300).

Earned Income Tax Credit (EITC) Adjustments

The maximum EITC for tax year 2024 is $7,830 for qualifying taxpayers with three or more qualifying children, an increase from $7,430 in 2023.

Fringe Benefits and FSA Limitations

Transportation Fringe Benefits and Parking

• The monthly limitation for qualified transportation fringe benefits and qualified parking rises to $315, a $15 increase from 2023.

Health Flexible Spending Arrangements (FSA)

• The dollar limitation for employee salary reductions for contributions to health FSAs increases to $3,200.
• The maximum carryover amount for cafeteria plans permitting unused amounts carryover is $640, up by $30.

Medical Savings Account (MSA) Requirements

Self-Only Coverage

• The annual deductible must be at least $2,800 (up by $150) but not more than $4,150 (up by $200).
• The maximum out-of-pocket expense amount is $5,550, increased by $250.

Family Coverage

• The annual deductible must be at least $5,550 (up by $200) but not more than $8,350 (up by $450).
• The out-of-pocket expense limit is $10,200, an increase of $550.

Foreign Earned Income Exclusion

For 2024, the foreign earned income exclusion is $126,500, up from $120,000 in 2023.

Estate Tax and Gift Exclusion

Estates of Decedents

• The basic exclusion amount for estates of decedents who die during 2024 is $13,610,000, up from $12,920,000 for 2023.

Annual Gift Exclusion

• Increases to $18,000 for 2024, up from $17,000 in 2023.

Adoption Credit

The maximum credit allowed for adoptions is $16,810 for 2024, an increase from $15,950 in 2023.

Items Unaffected by Indexing

Personal Exemption

• Remains at 0 for 2024, consistent since the Tax Cuts and Jobs Act.

Itemized Deductions Limitation

• No limitation for 2024, as was the case from 2018 through 2023.

Lifetime Learning Credit

• The phase-out for taxpayers with modified adjusted gross income exceeds $80,000 ($160,000 for joint returns), not adjusted for inflation post-2020.

Conclusion

The IRS’s inflation adjustments for the tax year 2024 are designed to reflect the changes in the economy and protect taxpayers from the eroding effects of inflation. These adjustments impact various aspects of taxation, including standard deductions, marginal tax rates, AMT, EITC, fringe benefits, FSAs, MSAs, foreign earned income exclusions, estate taxes, gift exclusions, and adoption credits. While some items remain unaffected by indexing, the overall changes are significant and should be carefully considered by taxpayers when preparing for the 2024 tax season. For a more detailed understanding, it is advisable to consult the IRS’s official documentation or seek advice from tax professionals.