Taxes can be a royal pain, but the Internal Revenue Service (IRS) continues its efforts to make nice with U.S. taxpayers. The agency has just announced its annual inflation adjustments for more than 60 tax provisions for tax year (TY) 2024, applicable when you file your taxes in 2025.
One of the most significant changes in an adjustment of the tax brackets to account for inflation. You'll find the new tax brackets here.
There are some other good things coming Americans’ way, too. Here are the highlights:
Married? One thing that married couples filing jointly for tax year 2024 will like is that the standard deduction will increase to $29,200, an increase of $1,500 from tax year 2023.
For single taxpayers and married individuals filing separately, the standard deduction goes up to $14,600 for 2024, an increase of $750 from 2023.
And for those of you who are heads of households, the standard deduction for 2024 will be $21,900, an increase of $1,100 from the amount for tax year 2023.
If you have a family, there’s a nice gift waiting for you, too. Come tax year 2024, the maximum Earned Income Tax Credit amount is $7,830 for qualifying taxpayers who have three or more qualifying children – an increase from $7,430 for tax year 2023.
Drive to work? There’s a bump up there, too – albeit small. For tax year 2024, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $315, an increase of $15 from the limit for 2023.
Have a Flexible Spending Account (FSA) at work? If you have an FSA benefit through your employer that allows you to pay for out-of-pocket medical expenses with tax-free dollars – insurance copayments and deductibles, qualified prescription drugs, insulin, and medical devices – the dollar limitation for employee salary reductions for contributions to FSAs increases to $3,200.
However, if you have a cafeteria plan that allows the carryover of unspent amounts, the maximum carryover amount is $640, an increase of $30 from taxable years beginning in 2023.
The best advantage may be in giving money away!
Give money to your kids? Every little write-off counts and the IRS is kind enough to give people who “gift” money another thousand dollars to use for TY 2024, when the annual exclusion for gifts will increase from $17,000 to $18,000.
If you’re not aware of how to take advantage of estate and gifting tax options, maybe this is a good opportunity. ConsumerAffairs asked Matthew Erskine, the managing partner at Erskine & Erskine, for techniques he would use for these situations.
“Take advantage of the increased lifetime gift tax exemption and generation-skipping transfer (GST) tax exemption,” Erskine suggests. “The IRS has increased the estate, lifetime gift, and GST tax exemption in response to inflation rates in 2022, offering an opportunity to preserve wealth for generations.
Erskine also recommends using the annual gift tax exclusion to transfer wealth tax-free. He says the advantage here is that the annual gift tax exclusion allows taxpayers to give up to a certain amount of money to another person each year without incurring gift tax. What’s not to like, right?
Playing that out further, Erskine made note of three other “gifting” options: gifts of appreciating assets, a grantor retained annuity trust (GRAT), and a charitable lead annuity trust (CLAT). Options he calls the most effective methods for preserving and transferring wealth in a tax-efficient manner.
The first – making gifts of appreciating assets – seems the simplest of the three. In this scenario, Erskine says that appreciating assets like stocks or real estate can be gifted to heirs, allowing them to benefit from future appreciation while avoiding estate and gift taxes.
As far as the GRAT – the grantor retained annuity trust – is concerned, going that route allows individuals to transfer assets to a trust and receive an annuity payment for a set number of years. Then, at the end of the term, any remaining assets in the trust pass to the beneficiaries tax-free.
The third idea – a charitable lead annuity trust (CLAT) – allows individuals to transfer assets to a trust that pays an annuity to a charity for a set number of years. Again, at the end of the term, any remaining assets in the trust pass to the beneficiaries tax-free.
“Keep in mind, though, the rules surrounding these techniques can be complex and change over time. It's crucial to work with a knowledgeable advisor who can guide you through the process and devise a strategy tailored to your unique circumstances,” Erskine advises. “Start taking steps now to protect your assets and ensure a lasting legacy.”