As the saying goes, the only constants in life are death and taxes.
While we can't avoid either, understanding the tax landscape can make the process a bit more manageable. The Internal Revenue Service (IRS) periodically updates tax brackets to reflect changes in the economy and inflation.
In this article, we'll explore the IRS' new tax brackets, how to find yours, and provide real examples for earners making $100,000 and $50,000 annually.
Understanding the New Tax Brackets
The IRS adjusts tax brackets to account for inflation and changes in the economy. Tax brackets determine the percentage of your income that you owe in federal income tax. The 2024 tax brackets have been updated, and taxpayers need to be aware of these changes to accurately plan their finances.
For tax year 2024, the IRS has introduced new income thresholds and tax rates. The seven tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The tax rates apply to different portions of your income, ensuring that individuals with higher earnings contribute a larger percentage to federal taxes.
How to Find Your Tax Bracket
Finding your tax bracket is crucial for understanding how much of your income will be subject to federal income tax. The IRS provides a straightforward way to determine your tax bracket using your filing status and taxable income.
You can refer to the official IRS website, or use online tax calculators to quickly find your bracket:
Real Examples: $100,000 and $50,000 Earners
Let's explore two real-world examples to illustrate how the new tax brackets impact individuals earning $100,000 and $50,000 annually.
Example 1: $100,000 Earner
Assuming a single filer with a taxable income of $100,000, let's determine the tax liability using the 2024 tax brackets.
• The first $10,275 is taxed at 10%: $10,275 * 0.10 = $1,027.50
• The next $29,275 is taxed at 12%: $29,275 * 0.12 = $3,513
• The remaining $60,450 is taxed at 22%: $60,450 * 0.22 = $13,299
Total Tax Liability: $1,027.50 + $3,513 + $13,299 = $17,839.50
Example 2: $50,000 Earner
For a single filer with a taxable income of $50,000:
• The first $10,275 is taxed at 10%: $10,275 * 0.10 = $1,027.50
• The remaining $39,725 is taxed at 12%: $39,725 * 0.12 = $4,767
Total Tax Liability: $1,027.50 + $4,767 = $5,794.50
One thing that surprises most of my students when I teach on taxes is the fact that our taxes are treated like a graduated cylinder and money gets taxed at the different levels as you earn. So, if you are in the 22% tax bracket, it does not mean all of your money is taxed at 22%.
Understanding the IRS' new tax brackets is essential for effective financial planning. By knowing your tax bracket and utilizing online calculators or consulting with tax professionals, you can make informed decisions to minimize your tax liability. Keep in mind that tax laws may change, so it's crucial to stay updated with the latest information from the IRS. As tax season approaches, take the time to review your finances and ensure you're prepared to navigate the intricacies of the tax code. Another smart thing to do is to work closely with both your CPA and a Professional Financial Services agent/advisor who focuses on the tax conversation when planning for retirement. I am constantly surprised when I learn my clients’ previous advisor never discussed taxes –the implications, reductions, and possible eliminations; but, most advisors are not permitted to discuss anything outside of their branded products. So, it’s not the advisor’s fault, but their hands are tied.
If you’d like to have a professional complimentary consultation and get ahead of the tax season crush, call us at 774-325-4649 or email us at info@mvplwrc.com
By: Valerie Clark, Retirement Specialist and Financial Literacy Instructor
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