Are you familiar with how our Federal tax code originated?
In 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Hoping to kill the idea for good, conservatives proposed enacting such a tax as they believed 75% of states would never ratify a constitutional amendment, according to the National Archives.
Much to their surprise, the 16th Amendment was ratified in 1913, establishing Congress’ right to impose a Federal income tax. Initially, fewer than 1% of the population paid income taxes. The rate was only 1% of net income due to generous exemptions and deductions.
Clearly, the tax code has changed dramatically over the years, and it will continue to change.
Last year, the IRS announced the annual inflation adjustments for more than 60 tax provisions – 63 to be exact – for the tax year 2024, including the tax rate schedules. As incorporated into law, the IRS adjusts various categories to account for inflation.
It’s not a perfect measure, but the adjustments help mitigate the impact of inflation on income. Without indexing, a cost-of-living raise, for example, could automatically push you into a higher tax bracket or reduce the value of your standard deduction.
However, annual inflation adjustments do not cover all tax provisions.
Tax brackets and tax rates have changed, as well as the standard deduction.
In tax year 2024, the standard deduction rises to $29,200 from $27,700 for those who are married and filing jointly. The standard deduction for single filers and married and filing separately rises to $14,600 from $13,850. For head of household, the standard deduction rises to $21,900 from $20,800.
If you are 65 or older and single or head of household, you may take an additional deduction of $1,950. If married and filing jointly or separately, you may take an additional $1,550.
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the standard deduction, simplifying the filing process, as it eliminated the need for many taxpayers to itemize. But it also scrapped the personal exemption.
Unless extended, please be aware that many provisions of the TCJA will expire at the end of 2025.
Among the expected changes:
- Individual income tax rates will revert to their 2017 levels.
- The standard deduction will be cut roughly in half, the personal exemption will return, and the child tax credit will be reduced.
- The estate tax exemption will be reduced.
- The special 20% tax deduction for pass-through businesses will disappear.
- The cap of $10,000 on state and local income taxes, which is not adjusted for inflation, will disappear. Those who are married but file separately may deduct up to $5,000 if they itemize.
The best way to stay on top of the details is with our annual compilation of the various tax rates, thresholds, limitations and exemptions for the new year.
This reference card can help you:
- Save time by providing easy access to financial numbers that matter to you.
- Manage your overall tax bill by using tax deductions and credits listed.
- Make informed decisions to avoid additional taxes and penalties.
- Spot tax-efficient opportunities to save for a comfortable retirement.
- Plan for health care expenses in retirement.
- Gain tighter control over your money and assets.