Record inflation over the past two years has pushed up the price of nearly everything, particularly gas, which has a broad ripple effect on the prices of goods everywhere, from groceries and consumer goods to raw materials and components used in manufacturing.
But one area where inflation may benefit many Americans is on their tax returns next spring. Automatic inflation adjustments to everything from individual tax brackets to 401(k) salary deferral limits to certain tax credits will rise, enabling most taxpayers to keep more of their money.
According to a report by Bloomberg Tax & Accounting, inflation-adjusted amounts in the tax code for 2024 will increase by roughly 5.4% over 2023 levels. While this is down slightly from the 7.1% increase taxpayers experienced in 2023, it is nearly double the 2022 increase of 3%.
According to Bloomberg’s annual Projected U.S. Tax Rates Report, high inflation is the primary driver of these anticipated increases. While the annualized inflation rate for 2022 was an eye-popping 8%, it has dropped precipitously this year and is expected to settle in at an annualized 4.5% by year-end. The good news is that projections for 2024 envision an annualized inflation rate of 2.3%.
The IRS typically announces annual adjustments to tax code amounts in October or November, but Bloomberg’s early projection is based on U.S. Department of Labor statistics and historical adjustments. Taxpayers and tax professionals use these projections to start planning for the next tax filing season and for making tax-smart changes before the end of the year that may benefit them.
The report anticipates significant year-over-year increases in some deductions, with the foreign earned income exclusion going from $120,000 to $126,500 and the annual exclusion for gifts growing from $17,000 to $18,000, enabling taxpayers to up their gifts without worrying about tax implications.
The Bloomberg Report also takes into account the tax changes made under last year’s Inflation Reduction Act and the SECURE 2.0 Act. For the Inflation Reduction Act, changes include an increase in the Section 4611(c) hazardous substance superfund financing rate and a bump up in the Section 179D deduction for energy-efficient commercial building property as long as new wage and apprenticeship requirements are met. For the SECURE 2.0 Act, changes include an increase in the wage limitation amount for the additional Section 45E credit for small employer pension plan startup costs from $100,000 to $140,000.
Below is sample data from the Bloomberg Report. For the complete data, see the report here.
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If you would like to discuss tax planning and preparing for the adjusted tax brackets in 2024, JLK Rosenberger can help. For additional information, call us at 949-860-9895, or click here to contact us. We look forward to speaking with you soon.