Making assumptions during critical financial periods can be costly. One of those is assuming that everyone knows how our tax system works. Many people know that we pay more in taxes when our income is higher, but that’s only half the truth. Yes, we do pay more, but not on all our income. We’ll explain that in more detail in this article.
The United States tax system can be confusing, even for those who’ve been paying taxes for many years. Our country uses a progressive tax system. That means you’re taxed at a higher rate for income that exceeds a specific amount. That higher rate is called your “marginal tax rate.” The 2023 federal tax brackets and marginal tax rates are in the chart below:
Income Brackets and Marginal Tax Rates for 2023
| Marginal Rate | Individual Income | Married Filing Jointly Income |
| 10% | $11,000 or less | $22,000 or less |
| 12% | $11,001 to $44,725 | $22,001 to $89,450 |
| 22% | $44,726 to $$95,375 | $89,451 to $190,750 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 |
| 37% | $578,126 or more | $693,751 or more |
The “income” fields on the chart above are for adjusted gross income (AGI), which is your gross income minus pre-tax deductions like retirement savings contributions, health insurance premiums, student loan interest, educator expenses, etc. Check with your accountant or read the IRS guidelines on AGI deductions to understand this better.
Our tax system is “progressive” because of how taxes are assessed. If your adjusted gross income is $50,000, you’ll pay a 10% tax on the first $11,000, 12% on the amount over $11,000 but under $44,725, and 22% on the amount over $44,725. If your AGI is $100,000, you’ll also pay 24% on amounts over $95,375. Pause for a moment to digest that.
Income Brackets and Marginal Tax Rates for 2024
The seven tax brackets are adjusted for inflation each year. You’re filing taxes now for what you earned in 2023, so use the chart above. The chart below shows what your income brackets will look like for 2024 (this year). You’ll file your taxes next year based on these numbers.
| Marginal Rate | Individual Income | Married Filing Jointly Income |
| 10% | $11,600 or less | $23,200 or less |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 |
| 22% | $47,151 to $$100,525 | $94,301 to $201,050 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 |
| 37% | $609,351 or more | $731,201 or more |
How to Maximize Deductions to Lower Your AGI
Certain deductions come off the top before your income tax is assessed. This saves you money by lowering your adjusted gross income. Contributions to 401(k) plans or traditional IRAs fall in this category. The IRS defers income tax on those until you withdraw the money in retirement. That means they can be subtracted from your gross income this year.
The Internal Revenue Service puts an annual cap on contributions to tax-deferred retirement accounts. The maximum allowed for 401(k) plans this year (2024) is $23,000 and the maximum contribution limit to a traditional IRA is $7,000. That’s $30,000 this year that can be used to adjust your gross income and reduce your tax liability.
Health insurance premiums that are deducted by your employer and student loan interest may be tax-deferred. They can help lower your AGI, which could put you in a different marginal tax bracket. Contributions to Roth IRAs are made with after-tax dollars, so they do not lower your AGI. Speak to someone in our office if you don’t fully understand this.
Be Prepared: Tax Planning is a Year-Round Activity
February is the perfect time to start planning for next year’s tax filing. You’re already making money that you’ll file a tax return on in 2025. Are you organized enough to have the lowest tax liability possible? Do you expect to get a decent refund? There are steps you can take today to make sure that happens. Wait too long and that opportunity won’t be there.
Saving receipts is a good example of this. Thousands of people take deductions every year without the receipts to back them up. Many get away with it, but some get audited, and those deductions get denied. You could be subject to fines, penalties, or imprisonment if the IRS decides to take a closer look at your books. Saved receipts can prevent that from happening.
Another example of getting prepared for next year is the addition of accounting or bookkeeping software to keep records. QuickBooks is a popular program for this. They have an online version and a self-employed version that can track your expenses and invoices. You can keep records all year and then invite your accountant to view them in your QuickBooks portal.
Now’s a Good Time for an Annual Budget Review
Suggestions that you contribute $30,000 to retirement funds or invest in expensive accounting software might seem overwhelming when you first hear them. One way to overcome that fear is to do an annual budget review. Seeing your income and expenses laid out in a spreadsheet will help you to better understand what you can and cannot afford.
A budget review is a good way to eliminate “non-essential” expenses. Examples include expensive premium movie channels, buying designer brands, and excessive take-out bills. Those all consume dollars you could be allocating to retirement savings or investment accounts. A budget review can help you increase your investment returns.
Contact our office today to schedule an appointment to do your taxes or to ask for help with your budgeting and recordkeeping. We’re happy to help you get organized. Our firm does personal taxes, business taxes, accounting services, payroll processing, and business consulting. Use the form on our contact page to reach out or call 262-253-9955.
