Important 2024 Tax Numbers

Tax rates are something everyone “loves.” Wrapping up at the end of 2023, new tax rates for 2024 have been released. If you’re funding your 401(k) or other retirement accounts, you may need to adjust for new contribution maximums.

We have a lot of important numbers that we’ll be going through in this article, but if you want a checklist, please send an email to info@pomwealth.net. 

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Federal Income Tax in 2024

It’s common to assume that if you’re in the 32% tax bracket, all income will be taxed at the 32% rate. Thankfully, in the United States, we have a progressive tax code which means that different portions of income are taxed at different rates that build upon each other. 

For example, a couple with $250,000 of taxable income in 2024 that are under the status married filing jointly will calculate their federal tax liability in the following manner:

• 10% on the first $23,200 of taxable income (which is $2,320 in tax)
• 12% on the next $71,100 of income between $23,200 – $94,300 (which is $8,532)
• 22% on the next $106,750 of income between $94,300 – $201,050 (which is $23,485)
• 24% on the remaining $48,950 of income exceeding $201,050 (which is $11,748)

In total, this couple would owe $46,085 in federal tax; this is much different in comparison to the entire $250,000 of income being taxed at 24% since that would result in a tax liability of $60,000. Because different portions of income are taxed at different rates, blending those rates together to calculate an average rate of tax can put into perspective what amount of income is actually paid towards federal tax. In this example, the couple’s average federal tax rate is 18.4%. What that means is for every $100 of taxable income this couple has in 2024, they are paying $18.40 in federal tax. NOT $24. 

For your reference, the current ordinary income tax brackets are:

Tax Rate	Single Filer	Married, Filing Jointly	Head of Household
10%	$0 to $11,600	$0 to $23,200	$0 to $16,550
12%	$11,600 to $47,150	$23,200 to $94,300	$16,550 to $63,100
22%	$47,150 to $100,525	$94,300 to $201,050	$63,100 to $100,500
24%	$100,525 to $191,950	$201,050 to $383,900	$100,500 to $191,950
32%	$191,950 to $243,725	$383,900 to $487,450	$191,950 to $243,700
35%	$243,725 to $609,350	$487,450 to $731,200	$243,700 to $609,350
37%	$609,350+	$731,200+	$609,350+

 

In 2026, the tax laws are going to “sunset,” meaning that unless a major political change takes place, the 12% tax bracket will increase to 15%. The 22% bracket will move to 25%, 24% is going to 28%, etc. This will impact everyone who files a tax return.

What is the standard deduction?

The standard deduction is available to everyone and varies according to your tax filing status. This deduction decreases the amount of income you will pay tax on. In 2024, the standard deduction is:

• Married, filing jointly (MFJ): $29,200
• Single: $14,600

What this means is that if you’re filing under the status MFJ, you will not pay tax on the first $29,200 of income you have in 2024. For example, with gross income of $40,000, subtracting the standard deduction of $29,200 leaves $10,800 of income that will be subject to tax. If in any year, your income is below the standard deduction, you will not owe any federal tax and may not even be required to file a tax return that year. If you are over age 65 or blind, you will receive additional deductions on top of these figures. The standard deduction is adjusted for inflation.

Long-term Capital Gains

A long-term capital gain is income from the sale of an asset that has been held longer than one year. Capital gains assets include:

• Real Estate
• Investment securities such as stocks and bonds
• Other tangible assets

Let’s say that you purchased stock at $10,000 five years ago, and today it’s worth $15,000. If that stock is then sold today, the $5,000 growth is taxed as a long-term capital gain.

Long-term capital gain tax rates are favorable because they are different from and typically lower than ordinary income rates:

• With taxable income less than $94,050, you will pay a 0% tax on capital gains
• With taxable income between $94,050 and $583,750, you will pay a 15% on capital gains
• With taxable income exceeding $583,750, you will pay a 20% tax on capital gains

Note: These figures are for the tax filing status married, filing jointly. Rates for the other tax filing statuses vary.

Based on these examples, you may want to consider selling 50% of a stock now and the rest after the New Year to avoid a large capital gains tax all in one year. You may even consider tax loss harvesting to mitigate gains.

Social Security Taxation While Working

When you’re working and earning an income, you pay what is called FICA tax on your earnings. FICA is money that you contribute to Social Security and Medicare. After a certain amount of earnings, you no longer pay into the Social Security portion of FICA tax; in 2024, that limit is reached at $168,600 of earned income. So if you make $200,000, you don’t pay the social security portion of FICA on the amount over $168,600. 

Social Security Benefits at Retirement

In 2024, social security benefits will receive a cost-of-living adjustment (COLA) of 3.2%, which is an adjusted rate based on inflation that puts more money into your pocket.

Anyone who takes Social Security before full retirement age will be limited on the amount of money they can earn, which is $22,320. If you earn more than this amount, you will have some sort of penalty on this overage.

It’s common to assume that social security benefits are tax-free, but if you have a certain amount of income, you may have to pay tax on your benefits. Your social security benefits can be:

• 0% taxable
• 50% taxable
• Up to 85% taxable

The portion of social security that is taxable to you depends on the amount of other income you have. We do have a full episode on Social Security and taxes, which we recommend that you either listen to here or read here.

Medicare Premiums

If you receive Medicare Part B and Part D, you will pay a monthly premium. In 2024, the standard monthly premium is $174.70 for Part B. If your income exceeds certain thresholds, you may also pay a surcharge in addition to your standard Medicare premiums. This is called the income-related monthly adjustment amount, or IRMAA. IRMAA is another complex topic that we’ve covered in great detail on our podcast and in a blog.

If you’re married, filing jointly with income below $206,000, you won’t pay a surcharge. If you earn between $206,000 and $258,000, you’ll pay an additional surcharge of $69.90/month/person. Medicare Part B surcharges can be as high as $419.30/month/person for income $750,000 or higher. The surcharges are adjusted per year based on your income.

This is why taking IRMAA into consideration is important when planning for a Roth conversion or year with high income for other reasons. 

Plan for Savings Going into 2024

Retirement planning is all about saving now so that you can retire in the future. If you automated your 401(k) contributions to max out last year and want to do the same in 2024, you will need to increase your contributions to meet the new maximum contribution. If your contributions are traditional/pre-tax, 401(k) contributions will reduce your tax liability for the year.

Maximum 401(k) contribution as an employee in 2024:

• $23,000 which is up from $22,500 in 2023
• Age 50 or older can contribute an additional $7,500 for total 401(k) contributions of $30,500 

Traditional and Roth IRA maximum contributions:

• $7,000 which is up from $6,500 in 2023
• Age 50 or older can contribute an additional $1,000 for total IRA contributions of $8,000

Eligibility for Traditional and Roth IRA contributions is dependent on two things: having earned income and having income below certain limits. If you’re retired and want to contribute to an IRA, you must have earned income of some form; you cannot fund these accounts with your general savings.

If your income is greater than $161,000 as a single person or greater than $240,000 married, you cannot contribute to a Roth account. The deductibility of a traditional IRA varies. If your income is greater than $87,000 as a single person or $143,000 married, you cannot deduct your contributions.

Health Savings Account

An HSA is an account that you can put money into and later distribute to pay for medical expenses. HSAs are powerful retirement savings tools because they offer triple-tax benefits: you don’t pay tax on the dollars contributed, you don’t pay tax on growth if you choose to invest the funds within the HSA, and distributions are tax and penalty-free as long as they’re used for medical expenses. After the age of 65, you’re no longer penalized and can take distributions for whatever reason, medical or not, but you will pay tax. 

HSA maximum contributions:

• $4,150 for a single person
• $8,300 on a family plan
• Age 55 or older can contribute an additional $1,000 for total HAS contributions of $5,150 single or $9,300 family

Again, we have a comprehensive worksheet that you can request by contacting us or scheduling a more comprehensive call if you like.