Each year, the IRS adjusts the dollar amounts of more than 60 tax provisions, including income tax brackets, the standard deduction, and the long-term capital gains tax brackets. The adjustments for the 2024 tax year were announced last week.
What are income tax brackets?
As we explained in this video, our income tax system is a progressive tax. That is, a higher tax is imposed on people with higher income, and a lower tax is imposed on people with lower income.
Contrary to popular belief, being in a certain income tax bracket does not mean that all your income is taxed at that rate. Rather, the income you earn in each bracket is taxed at that rate. For example, a married couple with a taxable income of $100,000 in 2024 would be taxed as follows:
For example, a married couple with an adjusted gross income of $129,200 taking the standard deduction
- 10% tax on their first $23,200
- 12% tax on their income between $23,200 and $94,300
- 22% tax on any amount over $94,300
It’s right to say this couple is “in the 22% tax bracket”. But their total income tax is closer to $12,100—much lower than 22%!
What is the standard deduction?
The standard deduction is a flat dollar amount that you subtract from your adjusted gross income. This, in turn, lowers your taxable income.
For taxpayers that have additional deductions, they can choose to “itemize” their deductions to get an even lower taxable income. Things that count towards itemized deductions include charitable giving, home mortgage interest, and medical expenses.
How are capital gains taxed?
A capital gain is the result of selling an asset that has appreciated in value from the time you purchased it. Capital gains are classified by how long you’ve owned the asset. For assets that were owned less than 12 months, a capital gain would be considered short term, while assets held longer than 12 months would be considered long term.
Short-term capital gains are generally taxed as ordinary income, while long-term capital gains have different tax brackets than ordinary income.
For a more in-depth explanation of the capital gains tax, check out our blog on the topic.
2024 Federal Income Tax Brackets
2024 Standard Deduction
2024 Long-Term Capital Gains Tax Brackets