Staying abreast of ever-evolving tax laws is key to avoiding penalties, complying with them and optimizing tax planning strategies. This may require making adjustments such as deferring income or moving items into one year in order to take a standard deduction instead of itemizing deductions.
2024 brings with it both challenges and opportunities for taxpayers. Many provisions from the Tax Cuts and Jobs Act (TCJA) are set to expire, which could significantly change tax liabilities of both individuals and businesses alike.
1. Changes in Tax Brackets and Rates
With inflation adjustments implemented for 2024, many Americans may notice their paychecks increase slightly due to 2024 adjustments by the IRS. They also raised income tax brackets and standard deduction amounts that will apply when filing returns in early 2025.
The IRS employs tax brackets to progressively structure income taxes; higher-earning taxpayers typically pay a larger percentage of their earnings in taxes compared with lower earners. A common misperception is that all income will be levied at the highest bracket rate; however, Cummings explained that people’s marginal tax rate (which applies only on their last dollar of earned income) tends to be considerably less than overall taxes due to rounding.
Cummings describes tax brackets as steps on a staircase; only income that falls onto each step is charged the applicable rate, making it essential to understand both federal and state tax brackets as well as any itemized deductions or contributions to tax-deferred accounts like 401(k)s or IRAs which could influence them.
2. Changes in Deductions
If you are filing your taxes in 2024, keep in mind that annual inflation adjustments take effect for some deductions and credits as well as new deductions related to clean energy are being added through tax reform legislation.
Pass-through entity owners (LLC, partnership or S corporation) should take note that the threshold for taking advantage of the 20% pass-through deduction has increased to $383,900 for joint filers and $191,950 for other taxpayers. There has also been an increase in threshold used to calculate self-employment tax (SE tax).
The SECURE Act 2.0 also offers additional tax breaks and benefits to small business owners, including an expanded employer pension startup credit and deducting employee student loan repayment contributions more easily. Furthermore, 16 new or expanded credits and deductions encourage retirement savings; all this can provide great advantages for entrepreneurs if their retirement savings goals are being achieved. If you need any advice on how these changes could impact your company further, reaching out to a financial advisor could be very beneficial.
3. Changes in Payroll Taxes
Payroll taxes are costs you cover as an employer to support federal, state and local programs. This cost typically includes your employee’s share of Social Security and Medicare taxes (commonly referred to as payroll tax rates) plus unemployment insurance premiums, workers compensation costs and any income taxes due on business earnings.
For 2024, the IRS has made adjustments to income tax brackets, standard deductions and retirement savings contribution limits in order to account for inflation. These adjustments could affect taxpayers of various income levels when filing their returns this year and could either cause them owe or receive refunds when filing their tax returns.
Additionally, various states are making changes to their payroll tax structures and requirements, impacting both employers and employees alike. Staying up-to-date with these adjustments is vital for accurate reporting and compliance purposes, and having a reputable payroll provider help make that easier while staying current with laws, rates, and compliance regulations affecting employers and employees alike. They can also communicate any updates to your team as well as providing resources so they understand their new withholding amounts.
4. TCJA Expiration
Time is running out for many Tax Cuts and Jobs Act provisions, including individual income tax cuts. Knowing their expiry dates is crucial for taxpayers in order to plan effectively for their finances.
The Tax Cuts and Jobs Act (TCJA) reduced marginal tax rates – that is, those that apply to your first dollar of income – while capping state and local taxes (SALT) deductions at $10,000 and eliminating personal exemptions; forcing taxpayers either to itemize deductions or select standard deduction.
Questioning whether these tax cuts will be renewed depends heavily on the outcome of this year’s elections. President Trump has indicated he wants these cuts made permanent if reelected, while losing and being replaced by a different party or Congress with differing ideologies could mean changes are put off or scrapped altogether. A clearer picture should emerge sometime around November or December; until then Brewer and Youngblood suggest taking advantage of lower rates by realizing any sizable investment gains before their rates rise back up again.
