The IRS has introduced new income limits for its seven tax brackets for 2024. Thankfully, the thresholds have all increased by 5.4% to account for inflation. In 2023, the IRS expanded its tax brackets by a historically large 7%, reflecting last year’s elevated inflation.
Although it’s getting harder and harder to earn a top one percent income, at least income earners whose incomes are not keeping up with inflation get to pay less taxes.
Let’s look at the 2024 income tax brackets. We’ll also discuss the new ideal income for 2024 for single filers and married filers.
The IRS increased the income threshold for each of its tax brackets by about 5.4% for each type of tax filer for 2024.
Altogether, there are seven federal income tax rates, which were established by the passage of the 2017 Tax Cuts and Jobs Act. They are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
2024 And 2023 Income Tax Thresholds For Single Filers
As a single filer, the ideal W2 income amount for 2024 is a Adjusted Gross Income of $191,950. This way, the single filer is paying a top federal marginal income tax rate of 24% and not 32%. The eight percentage points jump from 24% to 32% is large.
At a $191,950 Adjusted Gross Income, your effective tax rate is closer to 18%, which is quite reasonable. Then you’ll still have to pay anywhere from 0% – 6% in additional state income taxes depending on your state.
2024 And 2023 Income Tax Thresholds For Married Filers
For married filers, the ideal Adjusted Gross Income amount for 2024 is $383,900. $383,900 is the maximum threshold for the 24% federal marginal income tax bracket, which is up from $364,200 in 2023.
Please note: a married couple could earn a gross income of $428,900, but an Adjusted Gross Income of $383,900 after deducting $45,000 for two 401(k) contributions, to limit their federal marginal income tax rate to 24%.
Marriage Penalty Tax Threshold Begins At $487,450 For 2024
Notice how $383,900 is exactly double the single filer threshold for paying the 24% federal marginal income tax rate. In fact, every income threshold is double for the same tax rate for married filers except for the 35% and 37% federal marginal income tax rates.
In other words, there is no marriage penalty tax for two singles who individually earn up to $243,725, get married, and file as a married couple.
Single filers who earn between $243,725 – $609,350 pay a 35% federal marginal income tax rate. However, married filers that earn between $487,450 – $731,200 also pay a 35% rate.
In other words, the government doesn’t believe in equality between spouses after each earns more than $243,725. If the government did, the income range for married filers at the 35% rate would be $487,450 – $1,218,700, or exactly double the single filers income range threshold.
How Not To Pay The Marriage Penalty Tax
If you don’t want to pay a marriage penalty tax, then limit your earnings to a combined AGI of $487,450 or less. You’ll still be paying an onerous 32% marginal federal income tax rate on earnings between $383,900 – $487,450. However, at least you will be treated fairly by the government.
Alternatively, if your combined MAGI is greater than $487,450 and are still single, don’t get married. Over a thirty-year period, you may end up saving tens or hundreds of thousands of dollars in taxes.
Finally, if your combined income is looking to surpass an AGI of $487,450 in 2024, one spouse can make less or even retire early. For example, one spouse could earn the entire $487,450 while the other spouse earns $0 to keep their federal marginal income tax rate at 24%.
In the case of the case of the Chens households, Rachel earns $1 million a year while Colin earns $0 as a stay-at-home dad. Although Colin feels unsatisfied not generating an income, Rachel and Colin agreed that Colin spending any time earning a W2 income would be inefficient.
Given they are married, every dollar of Colin’s income would face a 37% federal marginal income tax, plus a 10.9% New York State marginal income tax, plus a 3.8% New York City tax for a combined marginal tax rate of 51.7%!
Would you be willing to work when your spouse already earns $1 million and the government takes more from you than you make? I wouldn’t. The only thing I’d be willing to do is work until I make the maximum 401(k) contribution amount so I can contribute the maximum for the year and pay zero taxes.
Sample Budget For The Ideal Income For A Married Couple In 2024
$383,900, the ideal Adjustable Gross Income for a married couple, provides for a healthy middle-class lifestyle in an expensive city. If you live in the Sunbelt, Midwest, or an 18-hour city, $383,900 should provide for a rich life.
It’s too bad federal income tax rates aren’t adjusted for the cost of living. But we are one country and we have the choice of living in whichever state we want. It just so happens that higher-paying jobs are generally more available in high-cost cities.
For reference, these are the states with no income tax or estate tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
Here’s a budget I created based off a married gross household income of $458,100 and the ideal adjusted gross income of $383,900 to pay a maximum 24% federal marginal income tax rate.
I think this is a great lifestyle if both parents are working jobs they enjoy. They are saving $45,000 a year in their 401(k)s, contributing $36,000 a year to two 529 plans, living in a nicer-than-median home, paying down mortgage debt, taking three weeks of vacation, and providing everything they want for their children.
Paying $99,814 a year in taxes is about $23,000 more than the median household income in America. However, it’s at a reasonable 26% overall effective tax rate.
Cash flow of $2,546 a year or $212 a month is tight. But this household can easily cut expenses if they need to.
2024 Standard Deduction
The standard deduction for married couples is also increasing 5.4% in 2024 to $29,200, an increase of $1,500 from 2023.
Single taxpayers and married individuals filing separately will have a standard deduction of $14,600, an increase of $750 from 2023.
Heads of households will have a standard deduction of $21,900, an increase of $1,100.
As you can see from my budget above, I’ve used the $29,200 standard deduction to simplify. However, as the couple’s itemized deductions are greater, they will likely have a cash flow greater than $1,458 at the end of the year.
The married couple’s taxable income is what’s left over after 401(k) contributions and the standard deduction. I then add back the $29,200 standard deduction given it is a non-cash expense to show a truer cash flow figure.
The Magical 24% Federal Marginal Income Tax Rate
A 24% marginal income tax rate is the maximum tax rate I’m willing to pay to the federal government. Anything higher and it’s just not worth it to me to work for money at this stage in my life.
When I was in my 20s and 30s, I was fine with paying between a 32% to 39.6% (old days) federal marginal income tax rate. I had a lot of time, energy, and desire to earn as much as possible.
However, once I hit 40, I started to feel that my time was way more important than money. I no longer wanted to first work for 4-5 months a year before I could start earning after-tax income. Today, by getting to keep 76% (inverse of 24%) or more of my marginal income makes earning active income worthwhile.
From an effective total tax rate perspective, which includes state income and FICA tax, I don’t think it’s worth paying over 25% – 26%. To calculate your effective tax rate, simply divide your total tax bill by your taxable income.
In the above budget example, the effective tax rate equals the total tax bill of $80,522 divided by the taxable income of $309,700 to equal 26%.
Focus On Earning More Investment Income
Now that you know the latest 2024 income tax rates, you should be more motivated to earn more passive investment income. Long-term capital gains tax rates are much lower than short-term capital gains tax rates.
The widest short-term and long-term capital gains tax differential is between 32% and 15%. Therefore, earning that total income range will save you the most money in capital gains taxes.
See the table below for 2023 rates.
Ways To Reduce Your Income Tax Bill
- Ask about a Non-qualified deferred compensation plan (NQDC). An NQDC lets you defer a percentage of your compensation for the future.
- Backdoor Roth IRA.
- Mega Backdoor 401(k)
- Max out your 401(k)
- Set up a Donor Advised Fund (DAF)
- Don’t appreciated assets to charity instead of cash
- Contribute to an HSA as a retirement vehicle
- Invest in startups due to the QSBS benefit
- Invest in real estate in opportunity zones
- Start a business to deduct business expenses
Enjoy Life And Pay Less Income Taxes
After negotiating a healthy severance package in 2012, I stopped making a high income the following year. Despite making 80% less, I was thrilled to pay 90% less in taxes!
It felt wonderful to spend time enjoying the public parks and free museums during the middle of the day. Finally, I was able to benefit from the things my large income tax bills went to!
If you’re earning a top income but are miserable, I’d save aggressively for the next three years and then take it down a notch. Life is too short to work long stressful hours for the privilege of paying more than a third of a dollar in income taxes.
Reader Questions And Suggestions
What is the maximum federal marginal income tax rate you are willing to pay? Have you found that your income is not keeping up with inflation, thereby not having to pay as much in taxes each year? What is the ideal income to earn as a single or a married couple?