For many people, one of the first major to-do list items of the New Year is to get their tax filing prepared and sent off to the Internal Revenue Service (IRS). But if you're the type who likes to take steps to get extra prepared as early as possible, January is also time to start organizing and planning for 2024. And even if you're not expecting any significant life events that could alter your following preparation, the IRS has already announced some changes to 401(k) limits and tax brackets for next year. Read on to see if you'll be affected by the updates when you go to file in 2025.
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People often use 401(k) and IRA plans to save for retirement.
ShutterstockSetting up a 401(k) is one of the more common ways people plan for retirement. The unique plan allows workers to tuck away a set amount of income—and potentially even have their employers match it—that remains untaxed up to a set amount, according to personal finance website NerdWallet.
Those who don't have access to a 401(k) or want to diversify their savings can opt for an individual retirement account (IRA). But while these plans offer some similar benefits, they have a much lower annual contribution limit and are relatively restrictive for those with higher incomes, per NerdWallet.
While they differ in structure, both offer a significant tax advantage for people looking to tuck away funds for later in life.
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The IRS just announced some changes to how much people can put into these accounts for the 2024 tax year.
iStockIf you have either of these retirement accounts in place, your tax filing might look slightly different next year. In a press release on Nov. 1, the IRS announced it was increasing the amount that individuals can contribute to their 401(k) annually from $22,500 in 2023 to $23,000 for the 2024 tax year. The new limits also apply to 403(b) and most 457 plans, as well as the the federal government's Thrift Savings Plan.
The limit on IRA contributions is also going up for 2024. According to the agency, the amount will increase from $6,500 to $7,000.
It's also adjusting income range limitations for traditional IRA eligibility. Single taxpayers covered by an employer-offered plan now have a higher phase-out range, increasing from between $73,000 and $83,000 in 2023 to between $77,000 and $87,000 in 2024. The agency's press release contains different amounts for married couples filing jointly or separately.
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Your personal income determines the tax bracket you fall into—and which rate you pay.
iStockWhile everyone in the U.S. who earns wages is expected to pay their taxes, the amount they send the government changes based on how much they make. The IRS uses income tax brackets with progressively higher rates to determine what is owed in federal income tax, according to NerdWallet.
The rate that each bracket pays is set by legislation, with the breakdown ranging from 10 percent on the lowest end up to 37 percent for the highest earners. These numbers won't change through 2025 after being established by law in 2017, according to Nerd Wallet.
Even though the percentages don't differ from year to year, the IRS does regularly tweak the income brackets fairly regularly. In fact, taxpayers in 2023 have already seen this change as brackets shifted upwards by 7 percent compared to 2022 due to inflation, Forbes reported.
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The latest IRS changes mean your bracket might be different in 2024.
iStockOn Nov. 9, the IRS announced it had made further inflation adjustments to the federal income tax brackets for 2024. The shift presents a 5.4 percent increase from the previous year.
The lowest rate of 10 percent now applies to any individual single taxpayer who earns $11,600 or less per year. It then increases to 12 percent for those who make between $11,601 and $47,149, jumps up to 22 percent for those making between $47,150 and $100,524, and 24 percent for people earning between $100,525 and $191,949.
The next bracket of taxpayers making between $191,950 and $243,724 will pay 32 percent. Those making between $243,725 and $609,350 will pay 35 percent. Above that amount, taxpayers fall into the highest bracket of 37 percent. A breakdown of brackets for married couples filing jointly can be found on the agency's notice.
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.
