Here, we are going to explain five key aspects that we consider crucial for taxpayers, especially those who benefit from credits like the Child Tax Credit.
Before diving into the changes, let’s take a look at how the IRS collects taxes. To fully grasp the impact of these changes, which, if expired, could leave us with a higher tax debt, it’s essential to understand how the IRS collects taxes.
We will focus on the tax payment we pay as individuals.
Let’s consider an example. Suppose in 2024 you earn $50,000 and file your federal tax return individually. The first thing you need to determine is what portion of that $50,000 is subject to taxes. It’s very likely that you can take advantage of what is known as the standard deduction, which reduces the income subject to taxation.
- Child Tax Credit: A significant benefit for families with children.
- Standard Deduction: Helps reduce the portion of your income that is taxed.
- Understanding your taxable income is crucial for accurate tax filing.
- Keep an eye on potential changes that could impact your tax liability.
- Always stay informed about how these changes might affect your finances.
By understanding these key points, you can better navigate the tax system and make the most of the benefits available to you. Stay informed and prepared to ensure you’re not caught off guard by any changes that could impact your tax obligations.
For an individual filing a tax return, the standard deduction for 2024 is $14,600. This means if you earn $50,000, you subtract the standard deduction of $14,600, resulting in your taxable income being $35,400. Therefore, you do not pay taxes on the entire $50,000 you earned, but only on $35,400.
How the IRS Calculates Taxes
Let’s dive into how the IRS calculates your taxes. For the first $11,600 of your taxable income, you will pay a 10% tax rate. The next portion of your taxable income will be taxed at 12%. In 2024, the 12% tax rate applies to income ranging from $11,601 to $47,150.
Breaking Down the Tax Calculation
Here’s a breakdown of the tax calculation:
- For the first $11,600 taxed at 10%, you will pay $1,160.
- For the remaining income up to $35,400, which falls within the 12% bracket, you will pay $2,856.
So, the total tax payment to the IRS would be $4,016.
Additional Tax Brackets
Besides the 10% and 12% tax brackets, there are five other brackets, with the highest reaching up to 37%.
Are you prepared for potential changes in your tax rates? If Congress doesn’t act, many of the current tax brackets might increase, meaning you’ll end up paying more in taxes. Let’s break down what these changes could look like.
Potential Increases in Tax Brackets
If temporary changes to the tax brackets are allowed to expire, here’s how the new rates will compare to the current ones:
- 10% bracket: Will remain at 10%
- 12% bracket: Will increase to 15%
- 22% bracket: Will increase to 25%
- 24% bracket: Will increase to 28%
- 32% bracket: Will increase to 33%
- 35% bracket: Will remain at 35%
- 37% bracket: Will increase to 40%
Background on These Changes
These potential increases stem from the Tax Cuts and Jobs Act (TCJA) passed in 2017. This act is set to expire at the end of 2025. According to the non-partisan Tax Foundation, the TCJA “reduced the average tax burden for taxpayers at almost all income levels and temporarily simplified the tax filing process through structural reforms.”
As we approach 2025, it’s crucial to stay informed about these possible changes and plan accordingly. Whether you’re an individual taxpayer or a business owner, understanding these adjustments can help you prepare for the future.
In the upcoming tax year, significant changes are on the horizon that could impact your finances. Let’s dive into these changes and understand how they might affect you.
The Standard Deduction Will Decrease (Reducing Your Taxable Income)
The standard deduction, which helps to reduce your taxable income, is set to decrease by nearly half for the 2024 tax year. For those filing individually, the deduction will drop to $6,350, and for those filing jointly with a spouse, it will decrease to $12,700.
This change marks a return to the levels that were in place before the recent tax law, the Tax Cuts and Jobs Act (TCJA), was enacted. The current standard deduction stands at $14,600 for individual filers and $29,200 for joint filers.
It’s important to remember that the standard deduction reduces the amount of income subject to taxation, and it is adjusted annually to reflect inflation.
The Child Tax Credit Will Also Be Reduced
The TCJA had doubled the Child Tax Credit from $1,000 to $2,000 per child, providing a significant benefit for thousands of families across the country. Additionally, the law allowed the IRS to refund a portion of this credit. This year, the refundable amount has been up to $1,600 per eligible child.
However, with the upcoming changes, this amount is expected to decrease, which could affect the financial planning of many families.
- Standard Deduction – Decreasing to $6,350 for individual filers and $12,700 for joint filers.
- Child Tax Credit – Previously doubled by the TCJA, will see a reduction in the refundable amount.
As these changes come into effect, it’s crucial to stay informed and adjust your financial plans accordingly. This way, you can better navigate the impacts on your taxes and take full advantage of available benefits.
In 2017, legislation not only improved various provisions of the credit but also expanded its reach. As a result, families with certain income levels who previously did not qualify have now been able to benefit from it.
Potential Changes to the 2017 Credit Rules
All of these enhancements could revert back to the rules that were in effect in 2017. However, it’s important to note that both the Democratic and Republican campaigns have expressed openness to further improving this credit in future administrations.
Kamala Harris’s Proposals for Permanent Credit Enhancements
Democratic candidate Kamala Harris has provided more detailed plans on this matter. The Vice President proposed making the credit levels established during the pandemic permanent and increasing the amount to $6,000 for eligible children under the age of one. In this note, we delve into this and other proposals she has made.
4. Potential Elimination of a Credit for Parents with Children Holding an ITIN
The 2017 TCJA law introduced a non-refundable credit of $500, which can be claimed by individuals with some dependents who do not qualify for the child credit.
Stay tuned as we continue to bring you the latest updates and insights on these important legislative changes and how they might impact your family.
For families with children who do not have a valid Social Security Number, taking advantage of certain tax credits can be challenging. One crucial requirement for the Child Tax Credit is that the child must possess a valid Social Security Number.
