The IRS has released the annual inflation adjustments for the 2024 tax year, showing a small increase in income thresholds for each tax bracket compared to 2023.
Your taxable income and filing status determine your tax rate and bracket, which determine how much you owe in taxes on different parts of your income. For 2024, seven federal income tax rates are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Below, CNBC Select explains the updated tax brackets for 2024 and what you need to understand about them.
READ ALSO: Common Forms You Need to Know to File Your Taxes
2024 Tax Brackets (for Taxes Filed in 2025)
The tax inflation adjustments for 2024 increased by 5.4% from 2023, which is slightly lower than the 7.1% increase the 2023 tax year had over the 2022 rates.
In 2024, the top tax rate of 37% applies to individuals earning over $609,350 for single filers, an increase from $578,125 last year. On the other hand, the 10% lowest threshold applies to those making $11,600 or less, an increase from $11,000 in 2023.
That means your tax liability could vary this year compared to 2023. For instance, if you earned $45,000 in taxable income as a single filer in 2023, your income tax would be calculated based on three tax brackets:
- 10% for the first $11,000 of your income, which amounts to $1,100.
- 12% for any income between $11,001 to $44,725 ($33,724), resulting in $4,046.88.
- 22% for the remaining income between $44,726 and $95,375 ($274) equals $60.28.
The taxes will amount to $5,207.16 for the 2023 calendar year.
For the 2024 calendar year, if you are earning $45,000, your tax breakdown would be as follows:
- 10% for the first $11,600 of your income, resulting in $1,160.
- 12% for any income between $11,601 and $47,150 ($33,399) equals $4,007.88.
The taxes will amount to $5,167.88 for the 2024 calendar year, where you would only pay approximately $40 less in taxes in 2024 compared to 2023.
What Is a Marginal Tax Rate?
Your marginal tax rate refers to the highest tax rate you pay on your income. Since the IRS taxes various tiers of your income at progressive rates, you will not pay a single rate on all your income.
For instance, if you are a single filer who earned $70,000 in income in 2023, your marginal tax rate is 22% because your income falls within the $44,276 to $95,375 tax bracket. However, only $25,724 of your income ($70,000 - $44,276) is taxed at 22%. The income you earn from $11,001 to $44,725 is taxed 12%, and the income you earn up to $11,000 is taxed 10%.
With the release of the IRS's tax inflation adjustments for 2024, planning for potential tax obligations in 2025 is prudent. If you anticipate owing less, you will have the opportunity to reallocate your funds elsewhere. For further details on the updates, you can visit the IRS.gov website.
Reducing the Amount of Taxes You Owe
Consider exploring available tax credits you may qualify for to lower your tax liability. Tax credits directly decrease the amount of taxes you owe, offering a dollar-for-dollar reduction in your tax liability. For instance, if you owe $2,000 in taxes and are eligible for a $500 tax credit, your tax liability would be reduced to $1,500.
Tax credits reduce your tax bill directly, whereas tax deductions decrease your taxable income by allowing you to subtract specific expenses or contributions from what the IRS taxes, which may come as a standard deduction, a fixed amount reduction, or as an itemized deduction, listed as eligible expenses. Deductions are typically based on expenses like mortgage interest, charitable contributions, or educational expenses, with corresponding income tax from withdrawals.
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