Your Guide to Inflation Adjustments for 2024 Taxes

The IRS recently released its inflation adjustments for 2024 related to personal income tax, retirement contributions, estate taxes, and Social Security benefits. While these changes won’t affect the tax return you’ll be filing in a few months, they will be helpful as you start planning for 2024.

Personal Income Tax

The standard deductions are increasing in 2024, which means a bigger tax break for you, as more of your income is automatically exempt from tax. 

The new standard deductions for 2024:

• Married filing jointly: $29,200, up $1,500 from 2023
• Single taxpayers and married individuals filing separately: $14,600, up $750
• Heads of households: $21,900, up $1,100

In addition, retired married couples (both age 65+) filing jointly receive an additional standard deduction of $3,100 ($1,550 each).

Takeaway: This will make it more difficult to itemize your deductions in 2024, which means your tax payments, mortgage interest and charitable contributions are less likely to provide you a tax benefit next year. As a result, you might want to consider a bunching strategy, where you accelerate as many deductible charitable expenses into 2023 to potentially increase your tax benefit. 

Retirement Savings Contributions

The 401(k) contribution limit is rising by $500, to $23,000. The overall savings limit, referred to as the 415 limit, is also increasing $3,000 to $69,000. This includes your own savings plus any matching or profit-sharing contributions from your employer.

For the second consecutive year, traditional and Roth IRA contribution limits will increase, from $6,500 to $7,000. Who can qualify for a Roth contribution has also changed: Married couples with income below $230,000 will be able to make a full Roth contribution next year, as will singles below $146,000. Those are up from $218,000 and $138,000, respectively, in 2023. 

Takeaway: Make sure you assess your retirement contributions to ensure you’re maximizing your benefits. Keep in mind the phaseout ranges are unchanged, so couples with income over $240,000 (and singles over $161,000) will not be eligible to contribute to a Roth IRA next year. Barring any legislative or other changes, the Backdoor Roth IRA strategy remains an option for those over the applicable income levels. 

Social Security

Social Security and Supplemental Security Income (SSI) benefits will increase 3.2% in 2024, an average increase of almost $60 per month. While this increase is well below the 8.7% increase for 2023, it is still the third highest increase since 2011.

Takeaway: Although these changes are beneficial for both individuals and married couples, the impacts of high inflation are still felt across the board. While inflation has slowed compared to the start of 2023, prices continue to be higher than previous years and may require you to review your cash flow strategy for the year to come.

As always, retirees have many factors to consider when choosing their start date for benefits – including how your start date could impact the surviving spouse – so it’s best to weigh all your options with your Baird Financial Advisor before making a decision to take a benefit.

Estate Taxes and Gifting

The gift tax annual exclusion is increasing from $17,000 to $18,000 for 2024 – the third consecutive increase to the gift limit. Individuals can gift up to this amount to any number of individuals in 2024 without incurring gift tax or using any of the taxpayer’s lifetime exemption. Married couples can each use this exemption, allowing them to gift up to $36,000 annually to each recipient in 2024.

In addition, the lifetime exemption amount increased approximately $700,000 per person, up to $13.61 million per individual. This increase means that a married couple can shield a total of $27.22 million from federal estate or gift tax. Those individuals who used their full exemption in recent years will now be able to make an additional tax-free gift to family members or others.

Takeaway: Note that the exemption is still set to sunset back by about 50% at the beginning of 2026. Your Baird Financial Advisor can be a resource for tax planning strategies to effectively transfer this wealth to maximize this exemption.

Although these changes won’t affect you until you file your 2024 taxes in the spring of 2025, they can be of tremendous help in your tax planning over the course of the year. Remember that certain kinds of planning strategies can take months or even years to implement. To get out in front of your taxes for next year and beyond, reach out to your Baird Financial Advisor.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.