EPS 30 - IRS Changes 2024: What’s New and How It Affects Your Taxes

In this episode of The Pink Money Podcast, host Jerry Williams breaks down the IRS’s most recent changes to the tax code — more than 60 adjustments that could affect your 2024 filing. From higher standard deductions and updated tax brackets to shifts in IRA contribution limits, AMT thresholds, and tax credits, Jerry explains what really matters in plain English. He also covers healthcare FSAs/HSAs, education credits like the American Opportunity and Lifetime Learning Credits, and how income levels affect deductions. Whether you file on your own or work with a professional, knowing these updates helps you avoid mistakes, maximize your benefits, and reduce tax-time stress.

Keywords/Tags: 2024 taxes, IRS updates, standard deduction, tax credits, IRA limits, Social Security, earned income credit, personal finance

💬 Have a question or comment? Contact Jerry here

Transcript

SPEAKER_00: 0:01

The best things in life are free But you can give them to

SPEAKER_01: 0:32

Welcome to the Pink Funding Podcast. I'm your host, Jerry Williams. And this is a podcast where we talk about all things related to money from a gay perspective. And today I'm going to talk about some of the more recent changes that the IRS made to the tax code. These are tax changes that were put into effect at the end of last year. There were more than 60 different ones that go into effect, and they're really going to affect you in the year 2024 when you file your taxes. So I'm going to go ahead and jump right in and let's talk about some of the more pertinent things that I think are going to affect most people. So one thing straight off is like the standard deduction. Standard deduction is really what most people take when they're filing their taxes. Either you take the standard deduction or you're going to itemize your taxes, and that really just depends really up to you. So if you take the standard deduction, you just deduct a flat dollar amount. It requires a lot less effort than when you itemize, and a deduction just reduces your taxable income, and it could save you sometimes more than what you would get by itemizing. And it depends on how many things that you itemize. But if you do itemize, then you can report each qualified deduction. It does require that you complete a Schedule A and maybe some other forms. The deductions reduce your taxable income as well. And on... The other hand, it could also save you more money than when you take the standard deduction. It's really hard to say which is going to benefit you just by saying I'm going to take this or I'm going to do that. You really have to sort of work out both. So it might cost you some money if you're having someone else do it for you, or you could just do it yourself. So if you do itemize, you can take things like your mortgage interest, you could take charitable deductions, you can deduct your state and local taxes up to like$10,000. You can take unreimbursed medical expenses, which is over as long as it's over seven and a half percent of your adjusted gross income. Those are just a few of the things that you could take. And it just requires that you have your I's dotted and your T's crossed. Because if you get audited, the IRS is going to want to know that you have the documentation to support these deductions that you're trying to take. Now, if you have someone who's doing your taxes for you, they are going to ask you a lot of questions about these deductions that you're claiming to because they have penalties that... they would face if they submit an inaccurate or incorrect return. So they can face up to a$600 penalty against the preparer for each failure to meet their due diligent requirements. And that's for things like the earned income credit, or the American Opportunity Credit, or the child tax credit, or the other dependent credit, or even when you file a head of household. So they will ask you a ask very pertinent, relevant questions that really dig and get to the meat of what they're looking for. And not only are they looking for it, they're putting this information on paper and submitting it to the IRS. The IRS is going to want to know, is this an accurate and correct return? Okay, because any preparer, paid preparer, they have to go through training, education, and get certified to be a preparer. And That way the IRS knows that this person who's doing returns for other people really knows what they're doing and isn't just some local yokel on the corner who's taking money from people and really doesn't know what they're doing. And same thing for you. You've got to submit the most accurate return possible. If you want to itemize and you're trying to claim this stuff, you need to have the records so if you get audited, you can prove to the IRS that these are legitimate deductions that you're taking and you have the proof behind it. If you don't, your return could be rejected and you could pay penalties as well. Something you don't want to really put yourself in that situation. So beyond that, most people are going to take, like I said, the standard deduction if they want the simplest and easiest way to file their taxes. If you're a married couple of files joint for 2024, there's a$1,500 increase on your standard deduction from last year, which means it's going to be$29,200. If you're a single taxpayer or you file married filing separately, then the standard deduction increases by$750 to$14,600. If you're filing head of household, the standard deduction will be$21,900, and that's an$1,100 increase from 2023. The depends as well on how old you are which means that if you are 65 or older or maybe blind then you can also take a higher standard deduction as well and that really just depends on your age meaning on the last day of the year that determines the age that you are and so you get a higher standard deduction if that is relevant to you so those Standard deductions, they kind of change every so often. Sometimes they change every year. Sometimes they don't. It just really depends. So whether you're filing that 1040, which is most people will file, but if you're a senior, then you file the 1040 SR. And they're similar, but there are changes. I mean, one of the chief differences is the SR has bigger type. So that's helpful, right? As you get older and sometimes it's more difficult to see things. But anyway, the marginal tax rates are also the things that change often. And the marginal tax rate, that's the amount of tax that applies to each additional level of income. We have what's called a progressive tax system. And that just means you pay more in taxes as your income rises, but you don't pay taxes on the entire amount in that tax bracket. Although people will often say that, you know, I'm in the 22% tax bracket. So that may or may not be accurate. It really just depends because right now there are seven different tax brackets. There's the 10%, the 12, 22, 24, 32, 35, and 37. And those are the exact same ones that there were last year. But let's just say, I think the IRS uses a$50,000 example. So let's just say if you're, making i'll just use this one forty five thousand dollars so if you are single and you have forty five thousand dollars of taxable income you pay ten percent on the first eleven thousand and then twelve percent on the income that falls between eleven thousand and one to forty four seven twenty five and the remainder two hundred seventy five falls into the twenty two percent tax bracket so although Again, not everything falls into that tax, that 22% tax bracket. It just means that part of it will. So the, again, saying that you're in the 22% tax bracket is sort of right, but it's not completely right because you don't pay 22% on your entire income. So you only pay that on part. Now, if you're trying to figure out, again, what your effective tax is or your average tax, now that is a little bit different because then you are truly talking about what is the average tax that you pay. So the average tax or the effective tax rate is just going to be the amount that you pay overall. And there's a pretty simple way to calculate it. You just take your total income and you divide it by the amount of tax that you pay, and then that's going to be your effective tax rate. Pretty simple, straightforward, right? And it just... may be helpful to you if you're trying to, like, for example, get a loan or something. They may ask you what your tax bracket, or what tax bracket you're in. But it's just helpful for you to know as well. But maybe not. Maybe you don't really need it, but at least you know how it's calculated. And I think the other thing that's relevant to this is the actual tax brackets, meaning the 10% goes from 0% to 11%. 12% goes from$11,601 to$47,150. The 22% tax bracket goes from$47,151 to$10525. And then the 24% goes from$10526 to$191,950. The 32% goes from$191,951 to$243,725. 35% goes from 243,726 to 609,350, and 37% goes to 609,351 and greater. So I don't know that that's common knowledge to everyone, but I think that it's relative, especially when you don't know how it works and now you have a better idea of how it works. So knowledge is power, right? Anyway... This doesn't really apply to your state. States have different ways of calculating your tax. Some states like Colorado have a flat tax. I think it's like a little over 4%. Some states like Wyoming, Texas, Florida, there are no state taxes. So it's really... It's really hard to say exactly how your state is going to tax it, but, of course, something that you want to find out, and, of course, you're going to know when you pay your taxes. Anyhow. The next thing I think that's relevant beyond the standard deduction and the marginal tax brackets is the alternative minimum tax. Now, what that means is it's a parallel tax system that's designed to make sure that high-income individuals, corporations, estates, trusts, they pay a minimum amount tax, even if they have deductions, credits, and other tax benefits that reduce their tax liabilities substantially. So when they fall into the AMT, there's two different tax rates,$26 And when they fall into this AMT system, then what that means is some of the things that they typically can take a tax deduction for will get added back in. And not everybody knows that. It used to be a lot more common because it didn't get adjusted for inflation, but it has gotten adjusted as time is marching on. marched on. And that's great because it should be. And what I mean by that is if some things like state and local taxes or home mortgage interest deductions, especially if it's not used to buy, build, or improve your home, or if there's a lot of miscellaneous itemized deductions or depreciation on certain property or even incentive stock options, all those can trigger AMT. And your taxes are just going to be more challenging to complete if you fall into the AMT tax system, and you're probably going to pay a little bit more. But that really just depends. For example, it depends on your filing status, but for, I believe it's 2024, the alternative minimum tax for single taxpayers is$85,700 and begins to phase out at$609,350. And for married filing jointly, it's$133,300 and phases out at$1,218,700. So if you fall within that range, it's quite likely that you might fall into the AMT. But it all depends. So jumping on from that, for the 2024 tax year, the Earned Income Tax Credit, the EITC, That amount is$7,830 for qualifying taxpayers who have three or more qualifying children. That's an increase of$7,430 from 2023. And there's a tax table that gives you some more clarity on how this works and what the phase outs are. And what I mean by that is you want to Take the full amount that's due to you, but you don't want to take more than what you can take because there are full deductions and partial, and then there's some that's none. So you just want to fall within that range. And again, the IRS is going to make sure that if you're claiming a qualified child, that that child is actually qualified. And there's a lot of different rules you really want to make sure that you follow so you don't get in trouble for that. So the other thing that's relevant is when you're trying to take a deduction for your IRA. So if you're taking a deduction for your IRA, that's similarly where you may be able to take a full tax deduction or no tax deduction. And it really depends on your income and whether or not you're covered by an employer-sponsored plan. So for 2024, for example, if you're single... and you or your spouse are covered by an employer retirement plan like a 401k, then your income, you can take a full IRA deduction if your income is$77,000 or less if you're single. If you're married filing jointly, it's$123,000 or less. There's a partial deduction if your income falls and you're single between$77,000 and$87,000. If you're married filing jointly, then if your income is more than$123,000 but it's less than$143,000, you can only take a partial tax deduction. And if your income and you're single, it's over$87,000, then it's called a non-deductible contribution. Similarly, if you're married filing jointly, it's above$143,000, it's non-deductible as well. So, Roth... contributions are not deductible, period, right? Because you're putting after-tax money into your IRA. We're really talking about in the traditional IRAs where you put in after-tax money that comes from your checking account, but once it goes into the IRA, then when you take a full tax deduction or even a partial tax deduction, then that's what really turns it into pre-tax money. So ultimately, when it comes out of your IRA later on in retirement, you don't pay taxes on money that's been taxed before. you only pay taxes on money that's never been taxed before. And that includes the earnings and the contributions. Now, if it's a non-deductible contribution or partial, then you use Form 8606 to track these non-deductible contributions. And it can be kind of tricky, you know, as time marches on, because we're talking about years upon years upon years of making contributions to your IRA. And then you've been taking these contributions deductions, maybe some partial, maybe no. And then there's a little bit of a formula that goes into, that's put into place when you start taking your tax deductions that calculates on every withdrawal that you make how much is actually going to be taxable. So similarly, if you and your spouse are not covered by an employer-sponsored plan like a 401k and you're single or married, then It doesn't matter what your income is. If you're single or married filing jointly, you can take a full tax deduction. And if you're married filing jointly but one spouse is covered, then if your income is$230 or less, you can take a full tax deduction. If you're single, there's no partial or non-deductible, but there is if you're married filing jointly and one spouse is covered. So again, full tax deduction if your income is$230,000 or less. If it's more than$230,000 but less than$240,000, there's only a partial tax deduction. And if your income is above$240,000, you can still make a contribution, but it's non-deductible. You cannot take a tax deduction in that case. So... That's just IRS rules. Maybe that'll change someday, but that's the way it is today. So speaking of that, for 2024, you can make a$7,000 contribution to your IRA. And if you're 50 or older, you can take an additional$1,000. And if you are... 50 or over, and you have a 401k, 403b, 457, or a SARSEP plan, then your annual contribution is$23,000. If you're 50 or over, you can add an additional$7,500. If you have a simple IRA plan, then your annual contribution will be$16,000. If you're 50 or over, you can add an additional$3,500. So all of those are basically$500 changes from the prior year. If you have a Roth IRA, similarly, your annual contribution is$7,000. If you're 50 or over, you have a$1,000 catch-up. However, when you do want to contribute to a Roth IRA, there are eligibility requirements. levels for contributions, which means if you're single or head of household, your income, if it falls between 146,000 or 161, then you are only gonna be able to make a partial contribution. If it goes above that, no contribution. Same thing with married filing jointly. If your income is between$230,000 and$240,000, then you're going to be able to make a partial. If it goes above$240,000, no contribution to your Roth IRA. If you're married filing separately, then the range is from$0 to$10,000. So if your income falls within that range, yes, you can make a contribution to the Roth. If it goes above$10,000, no contribution. Then you move to the traditional and make your contribution that way. You can go to the IRS if you want to see a table or learn more. I'll probably do another IRA podcast and talk a little bit more about how that works. But it just really right now is just for your FYI, really. So... There are different compensation plans as well that have changed, and some of those are significant, relevant, and salient to your individual tax situation. It really just depends. The other thing that's relevant, I think, to most people, and it really just depends on the health care plan that you have. So there are health savings accounts and flexible savings accounts. And there are dollar limitations for employee salary reductions and contributions to flexible health saving accounts. They have increased by$3,200. And for cafeteria plans that permit carryovers of unused amounts, the maximum carryover amount is$640, and that's a$30 increase from last year. So for flexible savings accounts, these are special accounts that you put money into and you use it to pay for certain out-of-pocket health care costs. So you contribute pre-tax money through your payroll deduction, and that reduces your taxable income. The funds that go into your flexible savings account are used within the year, and some of them have a grace period that, like I said, will allow for carryover of a certain amount of money. Like I said, this year it's going to be$640 from the prior year. But you can use it to pay for certain medical costs, dental and vision expenses that are not covered by insurance. Also things like co-pays, some deductibles, prescription medications. maybe even some over-the-counter items. I'm not an expert in these, but those are just some general rules. There are really two types of flexible savings accounts. There's the health care flexible spending account that, like I said, covers medical, dental, vision expenses for you, your spouse, and your dependents. And there's also a dependent care flexible savings account. And like the name suggests, it covers eligible expenses that are related to the care of dependents while you're at work, like daycare, after school programs, even elder care. But for 2024, the contribution limits for an FSA are$3,050 per year for the health care flexible spending account,$5,000 per year for single or married filing jointly, and$2,500 per year for married filing separately. Again, the benefits really are that you put pre-tax money in, it reduces your taxable income, and it saves you money on your federal, state, and social security taxes. So the full amount that you elect to contribute in your healthcare FSA is available really for use at the beginning of the year. Even though your contributions are made throughout the year, you can use that money throughout the year. And again, anything that's really not covered by your health insurance plans. But the downside to a flexible spending account is they have a use it or lose it rule. And that means Any funds that are not used by the end of the year are forfeited. You lose them. Some plans, like I said, will allow a small carryover amount, but some even allow a small grace period of maybe two and a half months to use what's left over. That's not... set in stone rule just depends on the plan. For dependent care, you know, they have even stricter rules and lower contribution limits than the health care FSAs. But, you know, a lot of people use them. I knew plenty of people who, you know, calculated how much they were going to pay in child care for the year, and that's how much money would go into their FSA. So it's helpful. That's what I'm really trying to say. But if you have a self-only coverage, maybe in a medical savings account, then that plan will have an annual deductible that's not less than$2,800. That's a$150 increase from the prior year, but not more than$4,150, which is an increase of$200 from 2023. So these are, again, plans that are a tax advantage to help you. They are tax advantage savings accounts that are designed to help you save for future medical expenses. And there are two types of these as well. There are the Archer MSA and the Medicare FSA. So the Archer is a personal savings account for medical expenses. It's really only available to self-employed people or employees of small businesses. And the Medicare FSAs are similar to the health savings account, but they're specifically for people who are enrolled in high-deductible Medicare Advantage plans, which is also known as Medicare Part C. Again, a whole different ball of wax, but if it falls into your realm, it's something to be aware of. So contributions to an Archer MSA can only be made by the account holder or the employer, but not both in the same year. Medicare MSA, the contributions are made by Medicare, but not by the account holder. Contributions are made with pre-tax dollars. It reduces your taxable income, but your earnings will grow tax-free. Very similar to like a Roth IRA or even your traditional IRA. I should have just said IRA, period. But The funds, again, for any medical expenses, including doctor visits, hospital stays, prescription drugs, and really a lot of other out-of-pocket health care expenses. These contributions to an MSA are set annually. An Archer MSA, it's typically a percentage of your health care plan deductible. The MSA funds remain within the count holder. with the account holder, even if you change jobs or healthcare plans. The HSAs are really different from the MSAs, which are just more limited in terms of who can open them. And again, if you're self-employed or in a small business that offers one, it can be very helpful to you, or especially again, if you're in a high deductible healthcare plan. So there is something for everyone in that realm, if those circumstances apply to you. So let's move on from that. And another thing that's changing in 2024 is the foreign income tax. earned exclusion, which is$126,500, which is an increase from$120,000 for 2023. Also changing is the estates for decedents who die in 2024. They have an exclusion amount of$13,610,000. That's above the$12,920 for last year. So meaning if you have... an estate that's above that, then estate taxes are going to apply. If you're below that, no estate taxes will apply. There's also the annual gift tax exclusion that has gone up to$18,000 from$17,000 last year. Also, there is a change to the adoption tax credit for 2024. It's gone up by a little bit. Let me restate that. It has gone up to$16,810, which is above the$15,950 for last year. So it's helpful. Hey, if it's money and you're able to get it, take it, right? Also, some of the things that did not really change, their personal exemption for 2024 remains at zero as it was for 2023. That is an elimination of the personal exemption that was a provision of the Tax Cuts and Jobs Act. and there's just really nothing more to really say about that. There is some other changes to your plans if you're in a 401K or a 403B, meaning if you have a plan and you're allowed to take advantage of it, certainly do so. But for 2024, the limit is$23,000. It's a$500 change from... prior year. If you're over 50, there's a catch-up contribution, which is again a$500 increase to$8,000 now. As I mentioned, the traditional or Roth IRA contribution has gone up by$500 to$7,000, as well as the catch-up contribution for over 50 has gone up by$500 to$8,000. Just to reiterate, The health savings account, if you're single, has gone up by$300 to$4,150. And the health savings account for family has gone up by$600 to$8,300. So all of those are relevant changes. There are some other ones that I want to go over briefly. I'm going to try to, I know we're already about a half an hour, and I know that this is probably getting a little confusing because there's a lot to it. I might have to do round two, but I'm going to go through some of these just real quickly and see how far I can get for you. But as I mentioned, the gift tax has gone up to$18,000. The estate tax has increased as well to$13.6 million. as well as the earned income tax credit. That's a refundable tax credit that's for low, moderate income workers. So you'll see a bump in 2024. This credit really depends on the income and the number of children, but people without kids can also qualify. So you really want to take advantage of that if you can. And in 2024, the credit will go up to$7,830 for taxpayers with three or more children. Also, there's the Opportunity Tax Credit. The American Opportunity Tax Credit is a federal tax credit that allows you to lower your tax bill by up to$2,500 if you paid that much in undergraduate education expenses last year. You can claim all of the first$2,000. that you spend on eligible education expenses like tuition, school fees, books, and supplies, plus 25% of the next$2,000 for a total of$2,500. So you cannot claim living expenses or transportation costs, but tuition and fees, books, supplies are probably going to be the lion's share of it anyway. So the American Opportunity Tax Credit is really for undergraduate college students only. You have to be pursuing it. degree or other recognized educational credential you have to be enrolled at least half time or at least one for one for at least one academic period beginning in the tax year you and have not finished the first four years of your education by the beginning of the tax year and you have not claimed the American opportunity tax credit for more than four years and you do not have a felony drug conviction by the end of the year So you can claim the credit on your taxes if you're a student for a maximum of four years as long as no one else like your parents claims you as a dependent. If so, your dependents will claim the credit instead of you. But if you're a student and you paid for your educational expenses, you just have to be listed on your return and not be dependent on anyone else's return. Hopefully that makes sense. So there's some, for that, there are some modified adjusted gross income ranges Just go through one. For example, if you're single, it's$80,000 or less. Married filing jointly, it's$160,000 or less. And that will give you the full credit. If you're single and your income is more than$80,000 but less than$90,000, you only get a partial credit. If you're married filing jointly and your income is more than$160,000 but less than$180,000, only partial. If you're a single filer, your income is$90,000 or more, there's no credit. If you're married filing jointly, your income is more than$180,000, also no credit. So the American Opportunity Tax Credit, what it does is it really lowers the amount of taxes you pay. If you owe$3,000, for example, in taxes and you get the full$2,500 credit, then you only have to pay$500 to the IRS. Is this a refundable credit? Yes. That means you can still receive 40% of the American Opportunity Tax Credit value up to$1,000, even if you earned no income last year or you owe no tax. For example, if you qualified for the refund, the credit could increase the amount you'd receive by up to$1,000. And that's why the American Opportunity Tax Credit, it's usually the best education tax break for students and your families. There's also the Lifetime Learning Credit. The Lifetime Learning Credit is a federal tax credit that can reduce your taxable income by up to$2,000 if you're pursuing an undergraduate, graduate, or vocational even, a vocational or even a non-degree program. So unlike the American Opportunity Tax Credit, there's no limit to the number of tax years in which you can claim the credit. The way this works is you can claim 20% of the first$10,000 you paid towards your tuition and fees for a maximum of$2,000. These for things like core supplies, living expenses, transportation costs that are not covered are qualified expenses for the Lifetime Learning Credit. The Lifetime Learning Credit is really, it's ideal for graduate students or anyone else taking classes to build your new... to develop new skills, even if you already claim the American Opportunity Tax Credit on your taxes in the past. So any of these things, you really want to seek some competent tax advice or read up on the IRS and just follow the rules. So again, you don't get in trouble by it. Some of these things I'll try to cover in a little bit greater detail in future podcasts as well. But again, students can claim the lifetime earning credit for themselves if you file your own taxes, or if your parents are claiming you as a dependent, they can also claim To claim the lifetime earning credit, the criteria is you have to be enrolled or taking courses at an eligible educational institution, be taking higher education courses to get a degree or another recognized education credential or to improve your job skills, and be enrolled for at least one academic period beginning at the tax year. So again, other information regarding the income ranges you want to take a look at. on the IRS website. I think that's where I'm going to stop right now because I know it's a firehose of information and there's a lot in there. I'm going to try to go over more information as we go forward. I think the more you know, the better you're going to be always because knowledge is power. That's pretty much it for me today. And other than that, I hope you have a great day and I will talk to you next time.