Understanding Taxes in 2024 and Beyond

Understanding key tax terms

for when you (or your tax professional) fill out and file your tax return:

Deductions – Something that can be removed from what you owed to help lower your tax bill. Common tax deductionsOpens in a new window include the standard deduction, the child/dependent tax credit and student loan repayment. Itemized expenses include charitable giving, state income tax, city property taxes and interest on your mortgage.

Taxable income – The amount of money that you pay your federal and (if applicable) state taxes on. It’s your income minus your deductions.

Federal income tax – The amount that you are required to pay to the federal government.

State income tax – The amount that you are required to pay to your state government (if applicable). Current nine states (Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington (state), and Wyoming) do not require state income taxes.

Pre-tax – The amount of money you earn before taxes are taken out. When it comes to retirement plans, pre-tax dollars are used for traditional IRAs and workplace plans. This means that you contribute more money now, but your money is subject to taxation when you retire.

After-tax – The amount of money you earn after your taxes are taken out. When it comes to retirement plans, after-tax dollars are used for Roth IRAs or in-plan Roth options. Since you are paying the taxes now you don’t pay any taxes when you access these funds in retirement. You can learn more about the differences between pre-tax and after-tax contributions by visiting our “Understanding Contributions” page.

Test Your Tax Bracket Knowledge

It’s that time of year again! Let’s put your bracket knowledge to the test. Tax bracket knowledge that is…

Tax Bracket Questions

1. How many federal tax brackets are there?
   A. Three
   B. Five
   C. Seven
   D. Nine 
2. True or False: All of your income is taxed at the same rate for federal taxes.
   A. True
   B. False 
3. Which action is one you can take to lower your taxable income for federal taxes?
   A. Invest in gold
   B. Open a Certificate of Deposit (CD) account
   C. Contribute to a pre-tax retirement plan
   D. Contribute to a Roth IRA
4. True or False: The federal tax rate is a set rate that rarely changes.
   A. True
   B. False 
5. The maximum federal tax rates have __ over the past 40 years
   A. increased 13%
   B. increased 22%
   C. decreased 22%
   D. decreased 13%

Tax Bracket Answers

1. C. Seven. The federal tax rates for 2023 are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
2. B. False. While many Americans think that their tax rate is one flat rate based on their income, the tax rate is actually a progressive tax rate that kicks in as your salary goes beyond the limit for each rate. So, if your taxable income was $100,000 for 2023, you will pay 10% on the first $11,600, then 12% on the amount from $11,601 up to $47,150, and finally 22% on the amount from $47,151 to $100,000.
3. C. Contribute to a pre-tax retirement plan. Your contribution to your pre-tax retirement plan is the only of the four options that will proactively lower your taxable income. This is because the money that funds your plan comes out before taxes are taken. The more you take out, the lower your overall taxable income. If you make less than $100k (or $201k combined with your spouse), this means you're getting a 22% bonus on your investment, as this is your top tax rate. If you make more, you're getting an additional 32%, and so on. Investing in gold or opening a CD won't provide any such reduction and all ROTH IRA contributions are post-tax.
4. B. False. In fact, the IRS adjusts the tax rates every year to allow for inflation. Plus, tax legislation as recent as 2017 made significant changes to the federal tax rate for individuals and businesses.
5. D. Decreased 13%. The top federal marginal tax rate in 1983 was 50% compared to 37% for 2023.
   Fun fact: the highest-ever marginal tax rate was 94% during World War II.

Prepare for Tax Changes

No one likes surprises when it comes to their taxes. For 2024 and beyond – here are three tax changes (and potential changes) that you need to keep on your radar:

1. You may need to start taking RMDs
If 2024 is the year where you need to start taking Required Minimum Distributions (RMDs) from your retirement accounts, you need to keep the following in mind:

• RMDs are, as mandated by federal tax rules, required distributions that you will need to take from your tax-deferred retirement accounts, such as employer-sponsored or traditional IRA plans. Roth accounts do not require RMDs.
• The age you need to take them is based on your date of birth. If you were born in 1951, 2024 will be the first year you will need to take RMDs from your affected retirement accounts or face the potential tax penalties by not doing so. It’s understandable to have questions about this process.

You can get more detailed information by visiting our RMD FAQs page.

2. Retirement Contribution Increase & Catch-Up Provision
A great way to ‘catch up’ on your retirement plan contributions is provided by the retirement plan catch-up provision which allows you to contribute more than the general maximum to pre-tax retirement plans. For 2024, this catch-up provision allows anyone age 50+ to contribute an additional $7,500 on top of the $23,000 employee contribution max (a $500 increase from last year). This means that if you are 50 or older, you can contribute up to $30,500 to your retirement account this year.

Existing Tax Law Expiring in 2025
When the Tax Cuts and Jobs Act of 2017 was passed, many changes to the tax codes for individuals were temporary. As the expiration date of 2025 approaches, here are three big tax changes that could come into play if the law isn’t amended or replaced:

1. The individual tax bracket rates will revert to the previous rates. So, prepare to have to pay 1 to 4% more (depending on your tax bracket) if the law is allowed to expire.
2. As part of the 2017 bill, the standard deduction was increased significantly, resulting in millions of American no longer needing to itemize their deductions and instead choosing the standard deduction often simplifying the tax filing process. The potential return of itemized deductions may make the tax filing process more complex, particularly for those who prepare and file their own taxes.
3. One of the unforeseen circumstances of the 2017 changes was that as less Americans chose to itemize their deductions charitable donations decreased. With the tax law set to expire at the end of next year, charitable organizations may see an increase of contributions from individuals who are eager to donate and enjoy the resulting deduction.