As we start the New Year, there have been some adjustments to the tax code. On a yearly basis, the IRS adjust more than 60 tax provisions for inflation to stop what is known as “bracket creep”. This occurs when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, rather than through any increase in real income.
The tax brackets increased about 5.4% for this year. This is smaller than last years increase of 7% because the inflation rate has coming down. For 2024, the standard deduction will increase between $750 and $1,500 from last year. These are the amounts of free money you get depending on your filing status as single, married filing jointly or head of household. The latter requires to have a non-spousal dependent living with you. The total standard deduction for a couple filing jointly will be $29,200 if they are under age 65 and not blind.
Most people do not file an itemized return since the standard deductions have gone up so much. This means it is harder to get a charitable deduction or write off interest expense for a mortgage. Credit card debt is not deductible except when it is business related. Taxpayers who itemize can claim a deduction for medical expenses if those expenses exceed 7.5% of adjusted gross income. One way to try and meet this standard is decrease taxable income, such as contributing to an IRA. Sometimes you can bunch medical expenses if they occur near the end of the year. This is when you try to pay either earlier or later to make this happen in one tax year.
Taxpayers who are paying for long-term care generally can deduct a portion of their premium as a qualified medical expense. The deductible varies based on the tax payer’s age and is subject to the 7.5% floor. Someone contributing to an IRA will reduce their income and thus their taxes. You can only contribute earned income which is basically what you pay Social Security taxes on. Some people can contribute to a Roth, while it also must be earned income, you do not get a tax deduction. You also do not have to pay taxes later on the earnings if you follow the rules. IRA will be taxable as ordinary income when you do take money out.
A few other important tax facts include the amount that you can contribute as a gift for the year will increase to $18,000. This is the amount that you can give to each individual without needing to file a gift tax return. Couples could both contribute to the same individual affectively doubling the total. You can do the same to multiple people. The retirement earnings test increases to $22,320. This is the amount that someone collecting Social Security benefits before their full retirement age can earn without a penalty. The amount of earnings a person can have before IRMAA increases their Medicare part B 7 D premiums will be $206,000 or less for couples and $103,000 for single tax payers.
The Tax Cuts and Jobs Act of 2017 or better known as the Trump tax cut expires December 31, 2025. That is only two years. Without congressional approval, taxes will revert to the earlier higher rates. At that time rates will revert back to the high previous rates. This means that you only have two tax years left to do tax planning. This is especially important to people who have large balances in qualified account such as 401k, IRA, TSP and others. These accounts can create a tax time bomb and possibly increase Medicare cost and cause a huge tax increase for a surviving spouse.