Inflation Adjustments Could Mean a ‘Tax Cut’ for Some
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While inflation is hardly cheerful news, some annual adjustments that are tied to an inflation index could provide relief in one unexpected area — taxes.
For a second year, the tax code will probably see higher-than-usual tweaks to the standard deduction, the tax bracket ranges and other inflation-influenced tax metrics.
The official IRS announcements are likely to drop later this month, but several tax analysts expect a roughly 5.4% increase across numerous tax provisions in early projections.
Here’s what those changes may mean for you.
Income tax bracket adjustments
In the U.S., seven federal tax rates can apply to taxable income: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Chunks of your earnings can be taxed at different rates, depending on which tax brackets they fall into.
Although the tax rates will remain the same in 2024 as in 2023, the income thresholds — where each rate begins and ends — will be adjusted for inflation.
For example, it's projected that in 2024, the ceiling for the 12% tax bracket will rise to $94,300, up from $89,450, for joint filers. This could allow some couples to shelter more of their income — almost $5,000 — from a higher tax rate.
According to Bloomberg Tax and Accounting, here’s how the rest of the tax brackets are expected to shift in 2024 for two common tax-filing statuses:
Married, filing jointly (2023) | Married, filing jointly (2024 projections) |
|---|---|
10%: $0 to $22,000. | 10%: $0: $23,200. |
12%: $22,001 to $89,450. | 12%: $23,201 to $94,300. |
22%: $89,451 to $190,750. | 22%: $94,301 to $201,050. |
24%: $190,751 to $364,200. | 24%: $201,051 to $383,900. |
32%: $364,201 to $462,500. | 32%: $383,901 to $487,450. |
35%: $462,501 to $693,750. | 35%: $487,451 to $731,200. |
37%: $693,751 or more. | 37%: $731,200 or more. |
Single filers (2023) | Single filers (2024 projections) |
|---|---|
10%: $0 to $11,000. | 10%: $0 to $11,600. |
12%: $11,001 to $44,725. | 12%: $11,601 to $47,150. |
22%: $44,726 to $95,375. | 22%: $47,151 to $100,525. |
24%: $95,376 to $182,100. | 24%: $100,526 to $191,950. |
32%: $182,101 to $231,250. | 32%: $191,951 to $243,725. |
35%: $231,251 to $578,125. | 35%: $243,726 to $609,350. |
37%: $578,126 or more. | 37%: $609,351 or more. |
Increased standard deduction
Also likely is a sizable bump to the standard deduction, a flat amount taxpayers can use to reduce their taxable income. Wolters Kluwer Tax and Accounting, a tax software and research firm, projects that married couples filing jointly can take up to $29,200 in 2024, up $1,500 from $27,700 for the 2023 tax year.
For the majority of taxpayers who take the standard deduction over itemized deductions, this means that they’ll be eligible to take a larger standard deduction when filing their 2024 tax returns in 2025. Here are the projections for 2024:
Single filers/married filing separately: $14,600, up from $13,850.
Married filing jointly: $29,200, up from $27,700.
Heads of household: $21,900, up from $20,800.
Higher savings contribution limits
Taxpayers may also get a chance to increase their contributions to certain accounts, which, in some cases, can also lower their taxable income.
Per Bloomberg Tax, you may be able to contribute up to $7,000 in 2024 to an IRA (up $500 from 2023). Those 50 or older also generally get a catch-up contribution that lets them funnel in an extra $1,000.
Health savings accounts
Those with health savings accounts, or HSAs — which allow taxpayers to contribute a certain amount of salary pretax for medical expenses — will be able to contribute up to $4,150 for themselves, or up to $8,300 for a family in 2024.
No guarantees
Although these adjustments will probably allow taxpayers to take a more generous standard deduction or funnel more money into accounts that could lower taxable income, there’s no guarantee tax bills will be smaller — after all, numerous factors affect tax liability.
It’s also important to note that some tax provisions are not annually adjusted for inflation, says Mark Luscombe, a certified public accountant and principal federal tax analyst for Wolters Kluwer Tax and Accounting in Riverwoods, Illinois.
This includes the state and local tax deduction, which is capped at $10,000 until 2025, and the capital loss deduction, a provision that allows investors with net losses to lower their taxable income by a max of $3,000 per year.
» Learn more about tax-loss harvesting
The bottom line: Changes to the code are meant to act as damage control: People whose wages may not have kept up with inflation could see a benefit, and those who received a cost-of-living raise may avoid getting bumped into a higher tax bracket. And a lucky few of us, perhaps, may even end up with a lower tax bill.
