The IRS introduced new income limits for its seven tax brackets for 2024. Thankfully, the thresholds for inflation have increased to 5.4%. In 2023, the IRS expanded its tax brackets by a historically large 7%, reflecting high inflation last year.
While it’s getting harder and harder for the top one percent to earn, at least income earners whose incomes don’t keep up with inflation pay less in taxes.
Let’s look at the 2024 income tax brackets. We will also discuss the new standard income for 2024 for single filers and married filers.
2024 Income Tax Brackets
The IRS has raised the income threshold for each type of tax filer by about 5.4% for 2024 for each of its tax brackets.
Overall, there are seven federal income tax rates, which were established with the passage of the 2017 Tax Cuts and Jobs Act. They are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
2024 and 2023 Income Tax Thresholds for Single Filers
As a single filer, the standard W2 income amount for 2024 is adjusted gross income of $191,950. Thus, a single filer has a top federal marginal income tax rate of 24% and not 32%. A large jump of eight percentage points from 24% to 32%.
On a $191,950 adjusted gross income, your effective tax rate is close to 18%, which is pretty reasonable. You still have to pay anywhere from 0% – 6% in additional state income tax depending on your state.
2024 and 2023 Income Tax Thresholds for Married Filers
For married filers, the standard adjusted gross income for 2024 is $383,900. $383,900 is the highest threshold for the 24% federal marginal income tax bracket, up from $364,200 in 2023.
Please note: A married couple may have gross income of $428,900, but an adjusted gross income of $383,900 after deducting $45,000 for two 401(k) contributions to cap their federal marginal income tax rate at 24%.
The marriage penalty tax threshold for 2024 starts at $487,450
Notice how $383,900 is exactly double the single filer threshold for paying the 24% federal marginal income tax rate. In fact, each income threshold doubles for the same tax rate for married filers, except for the 35% and 37% federal marginal income tax rates.
In other words, there is no marriage penalty tax for those who are two singles Earn up to $243,725 personallyGet married, and file as a married couple.
Single filers who earn between $243,725 – $609,350 pay a federal marginal income tax rate of 35%. However, married filers who earn between $487,450 – $731,200 also pay the 35% rate.
In other words, the government does not believe in equality between spouses after each earns more than $243,725. If the government did, the income range at the 35% rate for married filers would be $487,450 – $1,218,700, or exactly double the income limit for single filers.
How not to pay the marriage penalty tax
If you don’t want to pay the marriage penalty tax, limit your earnings to a combined AGI of $487,450 or less. You’ll still pay a hefty 32% marginal federal income tax rate on earnings between $383,900 – $487,450. However, at least the government will treat you fairly.
Alternatively, if your combined MAGI is more than $487,450 and are still single, don’t get married. Over a thirty-year period, you could save tens or hundreds of thousands of dollars in taxes.
Finally, if your combined income is intended to exceed AGI of $487,450 in 2024, one spouse can earn less or even retire early. For example, one spouse can earn the full $487,450 while the other spouse earns $0 to keep their federal marginal income tax rate at 24%.
In the case of the Chans family, Rachel makes $1 million a year while Colin makes $0 as a stay-at-home dad. Although Colin feels dissatisfied without generating an income, Rachel and Colin agree that it would be inefficient for Colin to spend any time on W2 income.
If they were married, Colin would pay 37% federal marginal income tax on every dollar of his income, and 10.9% New York State marginal income tax and 3.8% New York City tax for a combined marginal tax rate of 51.7%!
Would you be willing to work when your spouse already makes $1 million and the government takes more from you than you? I don’t. I would be willing to work until I reach the maximum 401(k) contribution amount so that I can make the maximum contribution for the year and pay zero taxes.
Model Income Budget for a Married Couple in 2024
$383,900, the standard adjusted gross income for a married couple, provides a healthy middle-class lifestyle in an expensive city. If you live in the Sunbelt, Midwest or an 18-hour city, $383,900 should pay for a wealthy life.
It’s too bad federal income tax rates aren’t adjusted for the cost of living. But we are one country and we have the choice to live in any state we want. It just so happens that high-paying jobs are generally more available in high-cost cities.
For reference, these are the states with no income tax or estate tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
Here I base a married gross household income of $458,100 and a standard adjusted gross income of $383,900 to pay the highest federal marginal income tax rate of 24%.
I think it’s a great lifestyle if both parents have jobs they enjoy. They’re saving $45,000 a year in their 401(k)s, contributing $36,000 a year to two 529 plans, living in a modest to nice home, paying off their mortgage, taking three weeks of vacation and giving their kids everything they want.
Paying $99,814 a year in taxes is about $23,000 more than the median American household income. However, this is at a reasonable 26% overall effective tax rate.
Cash flow is solid at $2,546 a year or $212 a month. But these family needs can easily reduce the cost.
2024 standard deduction
The standard deduction for married couples also increases by 5.4% to $29,200 in 2024, an increase of $1,500 from 2023.
Single taxpayers and married individuals filing separately will have a standard deduction of $14,600, which will increase by $750 starting in 2023.
Heads of household will have a standard deduction of $21,900, an increase of $1,100.
As you can see from my budget above, I used the $29,200 standard deduction to simplify. However, because the couple’s itemized deductions are higher, their cash flow at the end of the year will likely be greater than $1,458.
A married couple’s taxable income is what’s left over after 401(k) contributions and the standard deduction. I then add the $29,200 standard deduction because it’s a non-cash expense to show a truer cash flow picture.
The magical 24% federal marginal income tax rate
A 24% marginal income tax rate is the highest tax rate I am willing to pay the federal government. Working for money at this stage of my life is something high to me and not worth it.
When I was in my 20s and 30s, I was fine paying between 32% and 39.6% (the old days) federal marginal income tax rate. I had a lot of time, energy and desire to earn as much as possible.
However, once I hit 40, I started to feel that my time was more important than money. I don’t want to work 4-5 months a year before I start earning post-tax income. Today, making active income makes sense by keeping 76% (as opposed to 24%) or more of my marginal income.
From an effective total tax rate perspective, which includes state income and FICA taxes, I don’t think it’s appropriate to pay more than 25% – 26%. To calculate your effective tax rate, simply divide your total tax bill by your taxable income.
In the budget example above, the effective tax rate equals a total tax bill of $80,522 equal to 26% of taxable income of $309,700.
Focus on earning more investment income
Now that you know the latest 2024 income tax rates, you should be more motivated to earn more passive investment income. Long term capital gains tax rates are much lower than short term capital gains tax rates.
The broad short-term and long-term capital gains tax differential is between 32% and 15% Therefore, earning that gross income range will save you the most money in capital gains taxes.
See the table below for 2023 rates.
Ways to reduce your income tax bill
- Ask about a non-qualified deferred compensation plan (NQDC). An NQDC allows you to defer a percentage of your compensation for the future.
- Backdoor Roth IRA.
- Mega Backdoor 401(k)
- Your 401(k) max
- Set up a Donor Advised Fund (DAF).
- Don’t appreciate charitable assets in lieu of cash
- Contribute to an HSA as a retirement vehicle
- Invest in startups because of QSBS benefits
- Invest in real estate in opportunity zones
- Start a business to reduce business expenses
Enjoy life and pay less income tax
After negotiating a healthy severance package in 2012, I ended up making a higher income the following year. Despite making 80% less, I was thrilled to pay 90% less tax!
It felt wonderful to spend time in the middle of the day enjoying public parks and free museums. Finally, I got to benefit from my big income tax bill stuff!
If you’re earning a top income but are stingy, I’d save aggressively for the next three years and then take it down a notch. Life is too short to work long stressful hours for the privilege of paying more than a third of a dollar in income tax.
Reader questions and suggestions
What is the highest federal marginal income tax rate you are willing to pay? Have you noticed that your income is not adjusted for inflation, and thus you don’t have to pay as much in taxes each year? What is the ideal income to earn as a single or married couple?
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