Each year, the IRS adjusts its federal income tax brackets to account for inflation and other factors that drive wages and the cost of living higher. What that means for most income earners is the annual raise, which (hopefully) comes like clockwork, won’t affect the given tax bracket an individual is in.
That said, we all want to move up in our tax brackets, and paying more taxes isn’t always a bad thing. In 2024 (for the 2025 return), the seven federal tax brackets persist: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Individual brackets were determined by filing status and taxable income, including wages. However, the minimum amounts needed to reach these brackets were adjusted upwards.
Additionally, the IRS adjusted its standard deduction for 2024. That allows for households to deduct more of their expenses from qualified deductions (such as mortgage insurance, charitable donations and other expenses).
Let’s dive into everything you need to know about the new IRS tax brackets and deductions.
Updated Tax Rates and Brackets
The 2024 tax year features seven federal tax bracket percentages: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The 37% bracket applies to the highest earners, while the 10% bracket covers those with the lowest taxable income.
|Rate||Married Filing Jointly||Single Individual||Head of Household||Married Filing Separately|
|10%||$23,200 or less||$11,600 or less||$16,500 or less||$11,600 or less|
|12%||$23,201 to $94,300||$11,601 to $47,150||$16,551 to $63,100||$11,601 to $47,150|
|22%||$94,301 to $201,050||$47,151 to $100,525||$63,101 to $100,500||$47,151 to $100,525|
|24%||$201,051 to $383,900||$100,526 to $191,950||$100,501 to $191,950||$100,526 to $191,950|
|32%||$383,901 to $487,450||$191,951 to $243,725||$191,951 to $243,700||$191,951 to $243,725|
|35%||$487,451 to $731,200||$243,726 to $609,350||$243,701 to $609,350||$243,726 to $609,350|
|37%||Over $731,200||Over $609,350||over $609,350||Over $609,350|
The 2017 Tax Cuts and Jobs Act eliminated the personal exemption. Taxpayers with net investment income surpassing IRS limits ($200,000 for individuals, $250,000 for married filing jointly or $125,000 for married filing separately) face a 3.8% net investment income tax (NIIT) on income exceeding those thresholds.
Higher Standard Deduction
In 2024, the standard deduction will increase, reaching $29,200 for married couples filing jointly, $21,900 for heads of household and $14,600 for single filers. Those numbers increased by $1,500, $1,100 and $750, respectively.
Married seniors or those who are blind qualify for an extra standard deduction of $1,550, rising to $1,950 for single individuals or those not classified as surviving spouses. Claiming a dependent yields a standard deduction of $1,300 or $450 plus the individual’s earned income — whichever is greater.
The capital gains rate, which is lower than ordinary income rates (and beneficial to those who own equities), is contingent on taxable income and filing status. For the 2024 tax year, the 15% rate applies to adjusted net capital gains within specified income limits. The rate increases to 20% for amounts exceeding those limits.
Capital gains tax will be zero for people who don’t exceed these income levels for the 2024 tax year:
- $94,050 for married couples filing jointly
- $47,025 for single filers and married couples filing separately
- $63,000 for the head of a household
For these exceeding the above income levels, a 15% rate will apply:
- Up to $583,750 for joint returns
- Up to $291,850 for married individuals’ separate returns
- Up to $551,350 for head of household returns
- Up to $518,900 for individual returns
Individual Tax Credits
The earned income tax credit (EITC) for the lowest income bracket in the 2024 tax year has a maximum credit of $7,830 for three or more children — an increase from $7,430 in 2023.
For qualified adoption expenses, the credit is $16,810 in 2024. The lifetime learning credit (LLC) of $2,000 per return for educational expenses begins to phase out for taxpayers with a modified adjusted gross income (MAGI) exceeding $80,000 ($160,000 for joint returns).
The foreign earned income exclusion for the 2024 tax year is $126,500. The code aims to avoid double taxation by excluding income taxed in another country.
Earned income tax credit
In the 2024 tax year, the EITC maximum amount, applicable to the lowest income bracket, is adjusted for inflation. As mentioned, the credit for three or more children is capped at $7,830. However, EITC is disallowed if investment income exceeds $16,600.
Qualified adoption expenses
Qualified adoption expenses (QAE) refer to necessary costs paid to adopt a child under 18 or a disabled person. In the U.S., the IRS defines QAE as reasonable and necessary, allowing adopting parents to claim a credit or exclusion.
The exclusion from an employee’s income for qualified adoption expenses reimbursed under an employer plan is also increased.
Lifetime learning credit
The LLC in the U.S. federal income tax code allows parents and students to reduce tax liability by up to 20% of $10,000 worth of eligible education expenses. Notably, it’s non-refundable, meaning it can offset taxes owed, but doesn’t result in a refund.
Alternative Minimum Tax
The alternative minimum tax (AMT) applies to alternative minimum taxable income, with certain tax benefits added back, exceeding an exemption level.
In 2024, the alternative minimum tax exemption levels are as follows:
- Joint returns: $133,300
- Individuals: $85,700
- Married filing separately: $66,650
These exemptions phase out from:
- $1,218,700 for joint returns
- $609,350 for unmarried individuals and those married but filing separately
For single taxpayers and married filing jointly, the AMT rate is 26%, applying up to the first $232,600 of AMT income for 2024, increasing to 28% for income above that threshold. For those married filing separately, the 26% tax rate applied to the first $116,300 of AMT income, increasing to 28% above that threshold.
FSA and 401K
In 2024, the IRS increased the Flexible Spending Account (FSA) contribution limit to $3,200, up from $3,050. Additionally, participants can save more in tax-advantaged 401(k) and IRA accounts, as per the recent IRS tax-inflation adjustments (up to $23,000 annually in 2024, from $22,500 in the 2023 tax year).
The 2024 tax year sets the monthly limit for qualified transportation and parking fringe benefits at $315. Health FSA contributions are capped at $3,200, with a $640 carryover limit for cafeteria plans. Medical Savings Accounts (MSAs) have thresholds ranging from $2,800 to $4,150 and $5,550 to $8,350. The estate tax exemption is $13.61 million, and the annual gift tax exclusion is $18,000.
What Is Excluded?
Certain items, previously subject to inflation adjustments, remain unadjusted by statute. The personal exemption, eliminated by the Tax Cuts and Jobs Act, remains at 0 for tax year 2024, as it was in 2023. The limitation on itemized deductions, also eliminated by the Tax Cuts and Jobs Act, continues to have no effect for 2024, maintaining the status from 2018 onwards.
The modified adjusted gross income determining the reduction in the LLC stopped inflation adjustments after December 31, 2020.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.