While the holiday season is ideally a time for family and friends, it is also the best time to review tax strategies for the coming year. Tax planning includes topics such as tax-loss or gain harvesting, choices of investment vehicles, optimizing the order of withdrawals, and many others. Given the complexity of these tax considerations, it’s important to understand each approach and its implications. It’s also important to understand the economic climate’s effect on taxes, especially the impact of inflation. What do investors need to know as they plan for the coming year?

While inflation is effectively a hidden tax on consumers in that it reduces the purchasing power of cash, it also has an impact on actual tax bills. This is because incomes tend to rise in inflationary environments due to higher wages. Left unchecked, this can lead to “bracket creep” in which growing nominal incomes push taxpayers into higher tax brackets. To prevent these distortions, the IRS adjusts federal tax brackets each year based on inflation rates.

2024 Tax bracket thresholds are adjusted for inflation

In 2024, this adjustment amounts to a 5.4% increase in tax bracket thresholds and standard deductions. The top tax bracket of 37% will start at $731,200 for those with a status of “Married Filing Jointly,” up from $693,750 in 2023, while the lowest tax bracket of 10% tops out at $23,200 instead of $22,000.

Other rates:

• 35% for incomes over $243,725 ($487,450 for married couples filing jointly)
• 32% for incomes over $191,950 ($383,900 for married couples filing jointly)
• 24% for incomes over $100,525 ($201,050 for married couples filing jointly)
• 22% for incomes over $47,150 ($94,300 for married couples filing jointly)
• 12% for incomes over $11,600 ($23,200 for married couples filing jointly)
• 10% for incomes of $11,600 or less ($23,200 for married couples filing jointly).

It’s important to note that not all parts of the tax code receive these adjustments. Additionally, these adjustments only directly impact federal taxes, not state and local ones. In fact, the federal deductions for state and local taxes are not adjusted for inflation. The Net Investment Income Tax (NIIT), a 3.8% tax on investments that kicks in when income reaches $200,000 for individuals and $250,000 for married couples isn’t adjusted for inflation either.

The standard deduction increases to $14,600 for individuals in tax year 2024, up from $13,850 for this year. For married couples, it is $29,200 for 2024, up from $27,700. Most tax filers save money by taking the standard deduction instead of itemizing deductions, which includes deductions for medical expenses and charitable donations.

Regarding capital gains, an increase in the 0% rate applies to single filers up to taxable incomes of $47,025 and joint-filing couples with incomes up to $94,050. This tax applies to both short- and long-term capital gains.

For savers, 401(k)s and IRAs are also getting a bump. The 2024 contribution limits for 401(k)s will be $23,000, up $500 from this year (plus a $7,500 “catch-up” for those 50+). The contribution limit for individual retirement accounts for 2024 is $7,000, up from $6,500 this year (plus a $1,000 “catch-up” for those 50 and older).

The Social Security cost-of-living adjustment is 3.2% for 2024

Just like the tax bracket thresholds, there are also inflation adjustments to Social Security benefits. These Cost-of-Living Adjustments (COLA) help Social Security recipients by raising benefits as prices of goods and services rise. The adjustment for 2024 will be 3.2% based on an index known as the CPI-W which measures households that depend on “clerical or wage occupations.” This represents a deceleration from the 2023 increase of 8.7%, the largest since 1981, due to slowing inflation rates.

Thus, inflation has many impacts on personal finances, including taxes and retirement benefits. While inflation adjustments may help to prevent additional tax burdens this year, the future path of tax policy remains uncertain. Investors should focus on what they can control when it comes to their tax planning and strategies, rather than worry about what Congress and markets may do next. As always, investors should seek professional advice when making financial and tax decisions.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Data and analytics provided by Clearnomics, Inc. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.