Tax Brackets for 2023 – 2024

How the Tax Brackets Different From the 2022 – 2023 Tax Year?

Post-pandemic inflation had more of an impact on tax policy than some people may realize. The IRS did make some adjustments to avoid bracket creep, or the phenomenon where people are inadvertently pushed into a higher bracket because their income was inflation-adjusted. In practical terms, this means preventing people from paying cost-of-living adjustments to the government. 

For example, the 22 percent tax rate for the 2022 – 2023 year for a single filer was $89,075. Increasing the maximum for the 22 percent bracket to $95,375 helps ensure people near the edge aren’t punished for small bumps in pay, like the raises they might receive to compensate for inflation.

What About the 2024 – 2025 Tax Year?

There will be a similar adjustment to the tax rates workers and retirees will need to pay in 2025. For example, the upward income limit for a single filer in the 22 percent bracket will be increased to $100,525.

Ways to Reduce Your Taxable Income for Future Tax Years

Although there are many ways Phoenix tax filers can potentially reduce their taxable income, discovering, understanding and implementing the necessary strategies to accomplish your goals isn’t always straightforward or easy. It’s especially important that tax filers pursue these strategies according to state and federal tax law to avoid audits or penalties. If you have questions or concerns, it’s likely in your best interest to discuss tax planning with an experienced financial advisor or tax preparer.

Maximizing Pre-Tax Retirement Contributions 

Pre-tax retirement account contributions to 401(k)s, IRAs or other qualifying retirement accounts reduce your taxable income. When you do eventually take those dollars as taxable income during retirement, you may be in a lower tax bracket, meaning those dollars could potentially be taxed at a lower rate than what they would be taxed at if you were to pay them today.

Put Money Into a Health Savings Account (HSA)

HSAs are unique in that they offer three different tax benefits:

• The contributions you make to your HSA reduce your taxable income
• Funds saved in HSAs experience tax-free growth
• Withdrawals from an HSA for qualifying medical expenses are tax-free

If you have an HSA account, it may be beneficial to maximize your contributions (capped at $4,150 for self-coverage and $8,300 for family coverage) if you can afford to do so and it makes sense for your financial situation.

Deferred Compensation

Some workers may have the opportunity to defer certain types of compensation, like bonuses, to a later year. This can be helpful for people who experience income fluctuation from year to year.

Converting a Traditional IRA to a Roth IRA

IRA conversions can be a little complex but may be a good option for young or middle-aged workers who suspect they will end up being in a higher tax bracket in retirement. Converting from a pre-tax to post-tax account means the dollars currently in the IRA will be taxed during the conversion, but the money remaining in the account and new contributions can experience tax-free growth and withdrawals moving forward.

Strategizing Asset Allocation

If you have the option to do so, putting high-yield investments into tax-deferred accounts can help decrease your annual tax burden.

Charitable Contributions and Distributions

There are a number of ways in which charitable giving can have tax benefits. For example, some retirees may be able to use their RMD for a charity, in which case it wouldn’t be taxed as income. Some retirement savers may also be able to bunch charitable contributions in a single tax year through a donor-advised fund.

After-Tax Annuities

After-tax annuities can offer some retirement savers a way to enjoy tax-deferred growth beyond what they might earn through traditional retirement savings accounts that are subject to contribution limits. If you’d like to learn more about the ways in which annuities can be used to reduce your tax liability, don’t hesitate to consult with one of our financial advisors.

Find the Right Solutions for Your Financial Future

If you are seeking the most effective way to organize your finances to minimize your tax burden both today and in retirement, consider consulting with an experienced financial advisor at Fullerton Financial Planning. We can explain your options and the potential advantages and disadvantages of each. Call us at (623) 974-0300 to get started.