What the Middle Class Needs To Know About Taxes for 2024
While everyone who makes an income has to pay taxes, different socioeconomic classes face different tax considerations. The middle class may benefit most from tax considerations in 2024.
Read: IRS Increases Gift and Estate Tax Exempt Limits — Here’s How Much You Can Give Without
See: Owe Money To the IRS? Most People Don’t Realize You Can Do This – Today
The middle class, which ranges from a low end of $55,000 to a high end of $150,000, tends to have slightly more discretionary income, and a greater ability to save for retirement and college for their kids.
This makes it essential to understand tax rules and changes to maximize deductions and financial planning. Tax professionals explain what the middle class needs to know about taxes for 2024.
Your Money Doesn’t Go as Far
Middle-class salaries often look good on paper, but as True Tamplin, a certified education finance professional (CEPF) and founder of Finance Strategists, said, “The reality is, that what we used to think of as upper middle class isn’t the same anymore. Now, making $100,000 feels more like the old $60,000. And if you’re pulling in $40,000, it’s like you’re on the new poverty line.”
With these sorts of inflationary changes, he said, “it’s more important than ever to be smart with money, especially when it comes to taxes.”
Learn: Trump-Era Tax Cuts Are Set To Expire: What Retirees Should Know
Changes in the Standard Deduction
People who are traditionally employed should note that the standard deduction has increased, said Taylor Kovar, CFP and CEO and founder of Kovar Wealth Management.
“[S]ingle filers now have a deduction of $13,850, and married couples filing jointly have $27,700. This increase is beneficial as it lowers the taxable income.”
Changes in Your Marital Status
Tax brackets are determined by how much you earn — and typically, the more you earn, the higher your taxes, Kovar said. If you have a change in marital status, that could affect your taxes.
For example, “Single taxpayers earning up to $11,000 will fall into the 10% bracket, while those earning over $578,125 will be in the 37% bracket.”
“It’s important for middle-class taxpayers to understand where they fall in these brackets, as it impacts the percentage of income that’s taxed,” he said.
Retirement Contribution Limit Changes
There are also changes in the contribution limits for retirement plans, Kovar said.
“For 2024, the maximum contribution to a 401(k) plan is $23,000, an increase from 2023. This allows for more savings towards retirement with tax advantages.”
“The income ranges for deducting IRA contributions, contributing to Roth IRAs and claiming the Saver’s Credit has increased. For example, single taxpayers covered by a workplace retirement plan will see the phase-out range for IRA contribution deductibility increase to $77,000 to $87,000,” Kovar said.
Increase Your Contributions
Jeff Rose CFP, CPA, and founder of Good Financial Cents, encouraged the middle class to really take advantage of maximizing contributions to retirement accounts, both to minimize tax burdens and to plan for the future.
“I’ve never met anyone that saved too much for their retirement. In most situations people don’t save enough. So if you can afford to save as much as you can as soon as you can, the benefits of compound interest will yield a sizable nest egg so you can actually retire and not have to worry about how you’ll handle your retirement expenses,” Rose said.
529 Savings Plan Changes
Additionally, many middle-class people are saving for their kids’ college educations in 529 savings plans. While these are great plans because the earnings are tax-free as are the withdrawals so long as they’re used for qualified education purposes, some parents may be concerned that their child won’t go to college.
Now, according to Rose, however, “The rule changed so if your kid doesn’t go to college they can convert that into a Roth IRA.”
There are stipulations, however, such as a $35,000 rollover limit, and it does have to sit for 15 years before funds can be withdrawn, but it offers some flexibility if your child chooses an alternate path.
Gift Tax Changes
Since those in the middle class often have something to leave to their heirs, another notable change is the gift tax limit, which has risen to $18,000, Kovar said.
“This means individuals can give gifts up to this amount without tax implications.”
Consider Capital Gains Taxes
For people who do a lot of investing, Tamplin urged them to keep an eye on capital gains tax.
“The rates for long-term gains are pretty decent, but it all depends on your total income.”
The IRS Will Be More Aggressive About Side Gigs
2024 is a transition year for those with side gigs through platforms like Etsy and Airbnb, according to Crystal Stranger, JD, EA and senior tax director and CEO of OpticTax.com. This year, you’ll receive a 1099-k if you earned over $5,000 in side gig income last year.
“When a 1099-k is received, the IRS will be looking for at least that amount of gross income to be reported in the related tax return, and the income reporting rules for 1099-k are often a higher gross income amount than what the taxpayer receives in their bank account,” Stranger said.
Not reporting this income can lead to getting audit letters in the mail when a lesser amount was inadvertently reported, she said.
“Also, state taxes can be an issue, especially in states like New Mexico and Hawaii where services are taxed to residents, meaning that the equivalent of sales taxes may be owed on the gross income earned by residents of these states.”
Get Professional Help
Most importantly, if you have any questions or confusion, you should not try to do your taxes alone, Rose insisted.
Not only can a professional help make sure your taxes are done correctly, but “[t]hey can help you plan for the future. If you have another child on the way or are looking to buy or sell a home, or take on a rental property, are there any tax credits you can take advantage of? They can help.”
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This article originally appeared on GOBankingRates.com: What the Middle Class Needs To Know About Taxes for 2024
