Ep. 241 – Important 2024 Tax Numbers in Retirement

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In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the important tax numbers for 2024. Tax rate numbers for 2024 are out, and it’s important to understand them to make the necessary adjustments and know how your income will be affected.

Listen in to learn how the progressive tax system works and the importance of understanding your marginal and average tax rates. You will also learn about the 2026 tax rates sunset, long-term capital gains tax rates, standard deductions, and much more.

In this episode, find out:

• The tax rates for 2024 and the ranges for both single and married filing jointly.
• How the progressive tax system works and the importance of understanding your marginal and average tax rates.
• Understanding long-term capital gains and why it’s taxed differently from your income.
• The 2026 tax rates sunset – a tax law that will expire unless we have some significant political changes.
• It is understanding standard deductions and some additional deductions for both single and married filing jointly.
• Understanding the Social Security tax for 2024 and things to keep in mind about social security tax.
• Medicare premium part B and IRMAA and how you can be affected by additional surcharges.
• How the 401k, traditional IRAs, and Roth IRAs contribution numbers have changed for 2024.
• The Health Savings Account (HSA) tax numbers from an individual plan perspective and family plan for 2024.

Tweetable Quotes:

• “In general, your social security can be zero percent taxable, fifty percent taxable, or up to eighty-five percent taxable.”– Murs Tariq
• “If you make more than one hundred and sixty-one thousand as a single person or more than two hundred and forty thousand married filing jointly, you cannot put money into a Roth account.”– Radon Stancil

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	Welcome again to the Secure Your Retirement podcast. Murs and I today are going to be talking to you about something that everybody loves, and that’s tax rates. Yeah, it’s that time of year again where we are wrapping up 2023, and now they’ve put out 2024 tax rates and numbers and so we just feel that it’s really good to go ahead and talk through this, because some of these things you’re going to want to make adjustments to how you’re funding your 401(k)s, potentially. Sometimes people on their 401(k)s will just do a percentage of their income. Sometimes people do an actual dollar amount. So you want to make sure that if you want a max fund that you know what those numbers are, as well as you could get things that would affect your income and so you need to know the limits of what income is and how you’ll get taxed on that.
	So what we’re going to do is we’re going to walk you through a lot of the important numbers for 2024. I will tell you this, is if you listen to this and you’re thinking, “All these numbers,” there’s going to be two things that you can do. One is you can go read our blog, or number two, you can call our office or email us through our website and we will send you the important numbers for 2024 checklist that you can have and you’ll have all of them right there for you in writing.
	So let’s, first of all, talk a little bit about our federal income tax. Now, I want to set this up just for a part of it and then Murs can come in on this next, is that a lot of times people think the way it works when people hear about their tax bracket, so if they hear that they are in the 22, 24 or 32 percent tax bracket, some people think, “Oh, I don’t want to hit that tax bracket because now it bumps my taxes up on all the dollars.” And we have in the United States what is called a progressive tax code. And what that means is that let’s just say that I made a certain amount of money and then maybe $1,000 popped into the next tax bracket. Well, only that next little bit of money is what gets taxed at that next bracket. All the other money was in the lower tax bracket.
	So just keep that in mind, and we’ll make a couple of illustrations about this, but Murs, could you walk us through, I guess give us the range of brackets and then how they work a little bit?
Murs Tariq:	Yeah. And it’s a good point to point out the progressive tax system, because it can be confusing at times, especially when you’re trying to do some tax planning at the end of the year. The tax rates, those are still the same if you were to compare them to 2023 going into 2024. Those rates are what they’ve been for a bit now, 10%, 12%. Then we jump up, it’s a massive jump from 12 to 22%, then up to 24, then 32, 35, and then it caps out at 37 being the highest marginal tax rate that we have right now. And like Radon was saying, you have to fill up each one of those starting from the bottom, starting at 10. And so, let me just walk through an example, I guess, of let’s say we have someone that earns 250,000 a year. That’s their salary. So how is that money taxed? Well, according to the tax system, the first 23,000 of that 250,000 is going to fall into-
Radon Stancil:	Just make sure you say that’s married filing jointly.
Murs Tariq:	Yes, I’m sorry. Married filing jointly. So there’s married filing jointly, and then there’s single ranges. So they’re different for each of those two categories. The percentage is the same, but the ranges are going to be different if you’re married filing jointly versus single. So let’s go with a married filing jointly example. The couple makes $250,000 together, and so the first 23,200 will be taxed at that 10%. The next, so from 23,201 to 94,300 is now taxed at 12%. So now we’ve covered up to 94,000 and some change of that $250,000 earned income. And then from here, I said it earlier, this is a big jump. We go from 12, not to 14, not to 18, but it goes from 12 to the 22% bracket, and a lot of the money is going to be taxed in this bracket. So from $94,301 to $201,050 is now all going to be taxed at that 22% rate.
	So now we’ve covered 201,000 and some change of the 250,000 of earnings. The next is going to be the 24% bracket is where we’re going to stop. And that bracket, the range there goes from 201,000 roughly to 383,000. Now, there are things to consider as far as how all of this is actually taxed, and we’ve got deductions and we’re going to talk about standard deductions and things that can reduce your taxable liability. That’s kind of an idea as to how the progressive tax system works. It’s not, “Hey, if I make 250,000, let me go find the bracket. Oh, it’s the 24% bracket. All 250,000 is charged at 24%.” That’s not true.
	And so, what’s nice to understand is, yeah, what is my top tax bracket or my marginal rate, and then also understand this other word called an effective or an average tax rate. That’s taking an average of all the dollars paid in taxes over our income, and usually that percentage is typically lower than our marginal tax rate. So maybe you end up in the 24, but your average or effective tax may be 20 or 17 or something like that. So I think that’s a key thing to understand when we’re talking about our tax rates.
Radon Stancil:	Okay, very good. So now, let’s move on to another topic here and then talk a little bit about how these things work as well. We want to talk a little bit about what’s called long-term capital gains. Now, what long-term capital gain means is let’s say that I bought something that is in all essence something that is only taxed over a period after a year. One year is called long-term capital gain. That’s going to be an asset, something like say a piece of property. So it could be land, it could be a house, it could be a stock that I own. And if I hold that asset for at least one year, that now transfers into what’s called a long-term capital gain and it gets taxed differently than the tax rates that Murs was just talking about.
	So let’s say that I have a stock that I bought at $10,000 and I’ve held it now for five years and it’s now worth $20,000. I did say 10,000, didn’t I?
Murs Tariq:	Yep.
Radon Stancil:	Yeah, so now it’s worth $20,000. So the $10,000 of gain that I’ve got on that stock, if I were to cash it out, is now going to be taxed just on the 10,000 of growth on what’s called long-term capital gains. Now, whenever they do the calculation, they basically say if when I look at this, if I’ve got a gain that’s less than $94,000 roughly, $94,050 in there, then I don’t, and this is looking at all of my income by the way, not just my gain on that. So if I’ve got an income of less than $94,050, I don’t pay any capital gains. So let’s go to the example. I’ve got $50,000 of income that I’m going to call income, and then I go cash this in, which now gets me to 60,000. Well, I don’t owe any capital gain on that tax.
	If my income is anywhere from 94,000 to 583,000, well, now all of a sudden I’m going to pay capital gain, but only 15%. And I know I hate using the word only, because people go, “Whoa, 15%.” Just realize that that section of money is only going to get charged at 15%, whereas my ordinary income that Murs was just talking about, is going to be at a much higher tax bracket. If I make more than $583,000 in a year, then my capital gain tax is going to be 20%. Right? Now, remember, there’s different numbers in different thresholds. These were all I was going through were married filing jointly.
	And so here’s a key element. If I’ve got a highly appreciated stock, we can look at that and what we might do is, for example, let’s say that you today were thinking about selling a highly appreciated stock. It might be beneficial to say, what if we cashed in half of it or a part of it right before the end of the year and then cash in the other part at the beginning of the next year. Right? Only a couple, a few weeks between the two, but I spread that over two years instead of in one. So that’s a strategy to think through.
Murs Tariq:	Yeah. Also, there are other strategies as well that we don’t need to go into for today, like tax loss harvesting that a lot of people will consider at the end of the year, direct indexing. All things like that that can be beneficial to being able to mitigate some taxes here and there. While we’re still talking about tax rates, let’s go back for a second on the tax brackets in general. So I said earlier the 10, the 12, the 22, 24 and so on. What I forgot to mention is that something that’s important to remember coming up here in the future, is in 2026 our tax rates are set to, everyone’s using this word of sunset. So sunset, meaning that there is a tax law that is going to expire unless we have some significant political changes that says let’s keep them in place or let’s change them.
	And so I just wanted to give that example and maybe that’ll give you a bit of an urgency to say, “Hey, maybe tax planning and tax strategies are something that we really need to consider from 2024 and for 2024 and 2025.” So for example, the 10%, well, the 10% is going to stay in the 10% bracket, but in 2026, the 12 is now going to go to 15 unless there is some political change. The 22 is now going to go to the 25, the 24 is going up to the 28, and the 32 is going to stay at the 32. So those middle range tax brackets are going up a smidge, and a couple percent may not seem like much, but when you put it onto a dollar value, that can mean quite a bit. So I wanted to make sure we pointed that out, if you were thinking about it.
	Let me jump into what’s also important when it comes to taxation and understanding how much you’re going to be paying in taxes, is understanding what the standard deduction is. That is basically a dollar amount that comes right off the top of your taxable income or your gross income. And so for this, I will tell you both numbers. There’s married filing jointly and then there is if you’re filing single. For married filing jointly, the standard deduction for 2024 has gone up to 29,200. This year in 2023, that married filing jointly was 27,700. So it went up from 27,000 to about 29,200. So that has gone up. The single is 14,600 going into 2024. Previously it was 13,850.
	So these brackets, these ranges, these deductions, they’re all somewhat adjusted for inflation. And we all know we’ve had some inflation over the last few years, so these numbers are moving up for us. There’s also additional deductions that you would get. Say if you’re married, you get some additional deductions, 1,550 each for each spouse. And then if you’re unmarried or a head of household, there’s an additional 1,950 there.
Radon Stancil:	You did say that’s if you’re over 65, right?
Murs Tariq:	If you are over 65 or blind. So those are some additional deductions that certain people would get to add on to the standard as well.
Radon Stancil:	So, I just want to talk about that just for a second, just so you understand. So let’s say that, I’m just going to try to give you… Let’s say I make $40,000 as an income. Meaning, that’s what I got in my paychecks is $40,000. Well, 29,200 is going to come off of the 40,000, if I’m married filing jointly. 29,200 is going to come off of that income, so I’m only paying tax on a really small amount of my money because of that standard deduction. In all essence, if I made 29,200 and I got my deduction, I have no tax. It’s as if I made no income that year. So I get to make $29,200 without any tax under the way the tax code is set up today. Just wanted to be clear on what that means when we call it standard deduction.
	All right. Let’s jump over and talk a little bit about Social Security. Now we’re not going to go into a tremendous amount of detail on this one. I want to tell you though that we did an episode, 231. Episode 231 where we, along with the enrolled agent that works here in our office, went through Social Security taxation and exactly how it works. Okay? So go back and listen to that. I think it’s a great episode. But here’s some numbers. If you are working and you’re earning an income, you have to pay what is called a COLA tax on all of… or not a COLA tax. It’s called a FICA tax on all of the money that I’m making, which I have to pay in all essence, a Social Security tax, money that I’m contributing towards Social Security. What that is based on though is a certain amount of money, and then after that, I don’t have to pay the Social Security tax any longer.
	What that is going to be for 2024 is $168,600. So if I make 168,600, I’m going to pay that tax for Social Security all the way up. Now, what if I make 200,000? Well, all of a sudden, once I get above the 168,600, I don’t pay that FICA tax for Social Security. I do for Medicare, but not for Social Security. Sorry, I was looking at all my notes. What we’re saying though is that we do have a COLA increase that we have determined that will increase those of us who get Social Security by 3.2% going into 2024. A couple of things to keep in mind though, there are limits on how much I can make if I take Social Security before full retirement age, and that limit is if my full retirement age is $22,320. If I make more than that, then I’m going to have some penalty when it comes to my Social Security. So just keep that in mind.
Murs Tariq:	All right. So like Radon said, there is an episode on Social Security tax and how it’s taxed. I’ll give you a quick summary, but you should go listen to that episode. Basically, in general, this moves around a little bit, but your Social Security can be 0% taxable, it can be 50% taxable, or it can be up to 85% taxable. A lot of times there’s a bit of a misunderstanding that, “Hey, I paid into Social Security for so long and I’m finally getting my benefits, and I cannot believe that they’re going to tax me on these benefits.” It all comes down to how much income you earn with Social Security and then what they call combined income. So maybe you have other things that are generating income for you. I’m not going to go into the details on that. Just realize that your Social Security could come into taxability. Zero is great, but it could be 50% taxable or 85. Again, if you want to fully understand that, Taylor, the enrolled agent in our office, did a great explanation on that in that podcast.
Radon Stancil:	Okay. So now let’s talk about Medicare premiums. So if I get Medicare Part B and Part D, I have to pay a premium. The Part B though is what we’re going to focus on right this moment, which is we know in now 2024 is going to be $174.70 for me to get my Part B. What is important to understand here around this is that it is something called IRMAA, which is I-R-M-A-A. That’s the way when I say IRMAA, that’s the acronym there. Just remember that that could affect me and I might have a surcharge. Now, we’re not going to be able to go into all the detail on that, so I’m going to tell you about Episode 222. Episode 222, we went through all of the different parts of IRMAA. And they get updated each year, so 2024, we’ll go through and do another IRMAA update.
	But here’s the thing, if I’m married filing jointly and I make $206,000 or less, I’m going to have no surcharge on my Medicare Part B. But if I make above that, so I’m between 206,000 and 258,000, in addition to my 174.70, I’m going to have an additional surcharge of $69.90. So if I were doing things like I had a really big year of income or I did a big Roth conversion, I need to think about all those things because the surcharges can get as high as $419.30 married filing jointly of $750,000 or more. So just keep that in mind. The surcharges can be strategic. By the way, they only last one year based on our income. So if I had a really high income and the next year I took my income down, then it would get adjusted.
Murs Tariq:	Okay. So now let’s talk about what I think is really important as you start to plan for your savings going into 2024. Like Radon said at the beginning of the episode, our 401(k)s are sometimes set to auto and we say, “Hey, I’m saving. I’m doing my job. I’ve already set the percentage.” And maybe a few years ago you thought you were maxing it out based on that percentage. Just realize that those numbers changed as well, and so they have moved up a little bit for 2024 when it comes to what they call elective deferrals into a 401k. There’s other plans like 403(b)s or 457s, but just realize we’ll talk about 401(k)s, because typically they’re the most common.
	401(k)s, the contribution, so that’s how much you as an employee can put in through your salary deferrals, has been moved up. It was 22,500 last year. It has now moved up by $500 to $23,000. Also, if you’re above the age of 50, you get what’s called a catch-up provision that allows you to add an additional 7,500 into the plan. So that adds to 30,500 that you as the employee could be putting into your 401(k). Also, by the way, that money, if it’s going into pre-tax, gives you a nice little tax benefit. You don’t pay taxes on the dollars that go into that. So if you thought maybe four or five years ago you were maxing out and, well, the numbers were different four or five years ago, so check those percentages if your intention is to fully max out every single year.
	The other I would jump to is around traditional IRAs and Roth IRAs. That would be the next most common way of funding a retirement plan. There are some things in between. If you have a SIMPLE IRA or a SEP IRA, those numbers have moved as well. If you want to know what those are, give us a call and we’ll be happy to let you know. But on traditional IRAs, that is the pre-tax IRA, and the contribution limit there is 7,000. So that’s gone up from 6,500 to 7,000. And in the case of being 50 or older, you still have that catch-up of $1,000 additional dollars. So in the traditional and the Roth IRA, you could be putting up to 8,000 as well. On the Roth though, there’s something very important to understand. Radon, do you want to walk through what you need to know before funding into a Roth account?
Radon Stancil:	Yeah. Again, you can get all these numbers. I’m just going to tell you the big part of this. If you make more than 161,000 as a single person, you cannot put money into the Roth. If you make more than 240,000 married filing jointly, you cannot put money into a Roth. So just remember there is an income limit. The deductibility of a traditional IRA, ultimately, if I am single, if I make more than $87,000, I can’t deduct it. If I make more than 143,000 as a married filing jointly, I can’t deduct it. So just keep those numbers in mind. So I think, let’s jump on over here, Murs, to the health savings account, because that’s the next big thing that we should probably think about.
Murs Tariq:	Yeah. And let me add one more thing to the IRA. A common question we get is, “Hey, I’m retired. I’ve got income. Can I fund an IRA? The numbers have gone up. I’ve got 8,000 sitting around. Can I put money in?” It all comes down to what the IRS defines as earned income, which is really important to understand. Earned is through wages. So it can’t be from passive sources like rental income or investment income or even a pension or Social Security. The only way to fund a traditional or Roth IRA, you have to have earned income through some form of wages. So I just wanted to throw that out there.
	On the HSA, that’s a health savings account. I think it’s a very important account. It’s turned into a very powerful retirement planning tool for health expenses, and then at some point when you reach the age of 65, it becomes even more powerful. So those numbers, when it comes to your ability to contribute to them, again, you get a tax break on the dollars that go in them, is From an individual plan perspective, you can contribute up to $4,150. If you have a family plan, then you can contribute up to $8,300. That number has gone up from 2023. I don’t have that right in front of me, but I just realized that it has gone up. So again, just like the 401(k)s, if you thought you were maxing them out, just like the HSA, double check those numbers, if that is your intention to max those out.
Radon Stancil:	All right. We know we have gone through a tremendous amount of numbers. I just want to remind you, there’s two things you can do. You can go get our blog article, which is going to be on our website at pomwealth.net. Go to the blog page, we’ll have an article written all on this. In addition, if you would like to get just the numbers with no explanation really, but just all those numbers, we are glad to provide this worksheet to you. You’re just going to need to get in contact with us and we’ll email it over to you so you can have it there in front of you and see all these different guidelines. We hope this has been beneficial. If you have a conversation you’d like to talk to us, you can go to the website, top right-hand corner, click on schedule call. Our calendar comes right up. You can click on that and schedule that call. We’re glad to answer any questions that you might have. We hope you have a great week. We’ll talk to you again next Monday.