Category: Tax
How 2024 Inflation Adjustment Will Affect Your Paycheck
March 15, 2024
This year may come with slightly larger paydays for some Americans. This is because of the new changes to taxable income and deductions that the IRS has put in place in order to help taxpayers with inflation. With the cost of living increasing without wages and salaries doing the same, the new tax adjustments are meant to help consumers deal with higher prices.
As federal income tax brackets are adjusted by 5.4% this year, the change could result in a small paycheck bump, depending on what your withholding is. Since the consumer price index only declined by .1% in November 2023, many Americans are struggling financially.
Here’s everything you need to know about the 2024 tax changes that might affect your bottom line.
Decoding Tax Bracket Creep
The new IRS tax brackets and increased standard deductions have been in effect since January 1st. These adjustments will apply to your next tax return in 2025. It’s standard for the IRS to make changes every year to account for inflation. This is done to help people with the rising costs of living and prevent “bracket creep,” which happens when inflation forces people into a higher income tax bracket without their real income having increased.
So even if you make more money this year, these changes may keep you from falling into a higher tax bracket. You may even find that you have fallen into a lower tax bracket and see an increase in your take-home pay. This becomes even more likely if your pay has stayed the same as in the previous year. For example, if you made $45,000 last year, you would have been in the 22% tax bracket. In 2024, the same $45,000 income places you in the 12% bracket, which means you’ll owe less federal taxes and have less money withdrawn from your checks.
Choose Your Deduction and Know Your Taxable Income
The federal income tax bracket that you fall into determines how much you’ll pay in taxes for the year. Your tax bracket excludes the standard deductions or any itemized tax deductions. Most people with simple taxes claim the standard deduction, which reduces their taxable income. If you receive wages from only one job and receive a W-2, then the standard deduction is usually the best way to maximize your tax refund. But if you are self-employed or have specific deductions you want to claim, then you may elect to itemize your deductions instead.
Once you calculate your taxable income by subtracting either the standard or itemized deductions from your adjusted gross income, then you’ll know which bracket you fall into and how much income tax you should owe. “You always want to keep a running total in your mind of how your income is changing,” says certified financial planner Roger Stinnett. “Because it’s complex.”
2024 Tax Brackets and Standard Deductions
For the 2024 tax year, both the federal income tax brackets and the standard deduction were raised. These amounts will apply to your 2024 taxes, which you won’t file until 2025.
For those married filing jointly with a combined income between $23, 201 and $94,300, the estimated taxes owed would be $2,320. For a single taxpayer with an income between $11,601 and $47,150, they would owe $1,160, plus ten percent of any amount over $11,600.
The standard tax deduction for 2024 for those who file single will be $14,600, which is a $750 increase from 2023. For those married and filing together, the standard deduction will be $29,200, which is a $1,500 increase from last year.
Watch Your Withholdings
The federal and state withholdings on your paycheck will determine whether or not you’ll owe taxes at the end of the year or receive a refund from overpaying throughout the year. Regardless of your changes to your income, you may be placed in a lower or higher tax bracket because of the new adjustments.
It will be important to keep track of any life changes that may affect your filing situation, such as marriage, divorce, the birth or adoption of a child, retirement, buying a home, having to file for bankruptcy, and more. If you know your situation has changed since the previous year, it will be important to adjust your withholding by filing a new W-4 with your employer. If you had a large refund or owed a large amount last year, then this is a sign to check your withholding.
Other 2024 Tax Changes to Know
The IRS also announced higher contribution limits for tax-deferred retirement plans for the 2024 tax year. Americans may now contribute up to $23,000 into their 401(k), 403(b) and most 457 plans, which is $500 more than in 2023. The limit on annual IRA contributions also increases to $7,000, up from $6,500 the previous year. For those that save for added healthcare costs, the FSA contribution limit has also increased to $3,200, which is up from $3,050 for 2023. And if you collect Social Security, then you’ll receive a 3.2% cost-of-living adjustment in 2024.
The purpose of these tax changes is to help taxpayers feel the pain of inflation less. If you’ve noticed a higher paycheck, then different withholdings may be why. Figuring out whether or not you’ll be falling into a different tax bracket this year will help you determine if you’ll be benefiting from the new changes. Insureyouknow.org can help you store all of your financial information and tax preparation documents so that when it comes time to file, the process will be as painless as paying less taxes in 2025.
Five Things To Know About the Capital Gains Tax
September 15, 2023
It’s never too early to start planning for tax season. While much of what you own will experience depreciation over time, any profit made from something you sell may be subject to the capital gains tax. So if you think you’ll be making a return on a previous investment this year, then you’re going to want to be well-versed in the capital gains tax.
Understanding the Capital Gains Tax
A capital gains tax is a tax on profits made from the sale of assets, such as stocks, businesses, real estate, and other types of investments. When you sell anything and make a profit, the U.S. government views that profit as taxable income. The capital gains tax is calculated by deducting the original cost of the asset from the total sale of that asset. It’s important to understand the capital gains tax guidelines, such as profits made from real estate or collectibles, which come with their own unique rules. Understanding the rules can help you make the best decisions about your capital gains income.
In order to minimize losses and maximize your gains, here are five things to know about the capital gains tax.
The Real Estate Rules
If a person sells their home for $250,000 or less, or a married couple sells their home for $500,000 or less, then they are exempt from the capital gains tax; this exemption is only available once every two years. If you sell your home or any other investment property for more than that but reinvest the money made from the sale into a new property, then you would also be exempt from paying taxes on your real estate gains; this is known as the 1031 exchange. Cory Robinson, financial portfolio manager says, “That’s the beauty of taking gains: You can immediately reinvest.” For a home to qualify as a primary residence, you must have lived in it for at least two years, or two years out of a five year period. It’s important to understand the rules around property sales, so speaking with an advisor is always recommended before selling your home. “Familiarize yourself with the capital gains tax exclusion rules and consult a tax advisor,” says financial analyst Greg McBride. “If the property has been your primary residence for less than 24 months, for example, you may decide to hold off until you’ve reached that threshold to avoid capital gains tax.”
The Difference Between Short and Long-term Capital Gains
Put simply, if you have held any asset for less than a year before selling it, then that asset is considered a short-term capital gain and is subject to a higher capital gains tax; if you own that asset for longer than a year before selling, then your profit is considered a long-term gain and subject to a lower tax rate. This is why selling any asset before you’ve owned it for at least 12 months should be avoided if possible.
Investment and Rental Property Strategies
The rules around investment property are different since their value typically depreciates over time. A 25 percent rate then applies to the gain from selling real estate that depreciated, because the IRS wants to recapture some of the tax breaks you’ve been getting due to depreciation, known as Section 1250 property. If you sell a rental property that you have not lived in for at least two years for over $250,000 (or $500,000 if married), then that property could be subject to not only the depreciation rate but a capital gains tax that is based on your income bracket. One wat to avoid this could be to invest in property in opportunity zones, areas identified as economically disadvantaged, which are tax-free when sold after ten years. Deducting expenses, such as home improvements, repair, and even closing costs, is another way to lower the amount of profit that is subject to the capital gains tax.
Your Income Bracket Determines Your Capital Gains Tax Rate
Tax rates are determined by your tax bracket, so a lot of people will actually pay no capital gains tax on the sale of long-term assets if they fall in the 0% tax rate. For the 2023 tax year, a single person that made up to $44,625, and a married couple that made up to $89,250 jointly would not have to pay any capital gains taxes.
Keep Track of Both Gains and Losses
When an asset is sold for more than what it cost, it results in a capital gain, but when the asset is sold for less than it cost, it results in a capital loss. If you have both gains and losses, it will be important to know your net gain, or your gains minus your losses; only net gains are subject to the capital gains tax. If you only have losses in a given year, then capital losses could actually lower your taxable income. This loss is limited to $3,000 per year per person (or $1,500 if you’re married). If you have an excess of $3,000 in losses, then those losses can actually be carried forward to future tax years.
It’s never a good idea to buy or sell assets solely for tax purposes, but that doesn’t mean you shouldn’t be well aware of the rules around the capital gains tax. Insureyouknow.org can help you store all of your financial records in one place, so that it’s easier for you to keep track of your assets and taxable income. Before selling any investment, it’s important to know the laws unique to your state and speak with an advisor, who will know best what taxes you may be held responsible for. It’s good to know that for many, zero taxes on gains are actually possible.