We’re going to talk about five important things we think people should know, especially those who get credits like the Child Tax Credit.
Let’s look at how the IRS gets taxes before we get into the changes. To fully understand the effects of these changes, which could lead to a bigger tax bill if they expire, we need to know how the IRS receives taxes.
We will focus on the tax payment we pay as individuals
Let’s look at an example. Let’s say you make $50,000 in 2024 and file your own federal tax return. The first thing you need to do is figure out how much of that $50,000 is taxed. There is a good chance that you can use the “standard deduction,” which lowers the amount of income that is taxed.
- 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.
You can better use the tax system and get the most out of the perks you’re entitled to if you understand these key points. Make sure you know about any changes that could affect your tax responsibilities and are ready for them so you don’t get caught off guard.
The standard deduction for a person making a tax return in 2024 is $14,600. In other words, if you make $50,000, you take out the standard deduction of $14,600, which leaves you with $35,400 in taxed income. That is why you only pay taxes on $35,400 instead of the full $50,000 you made.
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
Two of the tax levels are 10% and 12%. There are five more, with the highest one going up to 37%.
Are you ready for the possibility that your tax rates will change? Many of the current tax rates could go up if Congress doesn’t do something. This means that you’ll have to pay more in taxes. Let’s look at these changes one by one.
Potential Increases in Tax Brackets
If the short-term changes to the tax brackets are allowed to end, these are how the new rates will compare to the old 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
The Tax Cuts and Jobs Act (TCJA), which was passed in 2017, could cause these price hikes. The end date for this act is the end of 2025.
A nonpartisan group called the Tax Foundation says that the TCJA “lowered the average tax burden for taxpayers at almost all income levels and temporarily made the tax filing process easier through structural reforms.”
As 2025 gets closer, it’s important to keep up with these possible changes and make plans for them. Whether you’re a worker or the owner of a business, knowing about these changes can help you get ready for the future.
There will be big changes coming up in the next tax year that could have an effect on your funds. Let’s look into these changes and see how they might depend on you.
The Standard Deduction Will Decrease (Reducing Your Taxable Income)
You can lower your taxable income by taking the standard benefit. For the 2024 tax year, it will be cut in half. If you file your taxes by yourself, the deduction will go down to $6,350. If you file with your partner, it will go down to $12,700.
After this change, things will be back to how they were before the Tax Cuts and Jobs Act (TCJA) was passed. For single filers, the standard deduction is now $14,600, and for joint filers, it’s $29,200.
Remember that the standard deduction lowers the amount of income that is taxed, and that it is changed every year to account for 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 changes could be undone, and the rules from 2017 could be used again. It’s important to note, though, that both the Democratic and Republican campaigns have said they’d be willing to make this credit even better in future governments.
Kamala Harris’s Proposals for Permanent Credit Enhancements
Democratic candidate Kamala Harris has given more information about her plans for this. The Vice President wanted to make the credit levels set during the pandemic permanent and raise the amount for children under one who are qualified to $6,000 a year. We talk more about this and other ideas she has put forward in this note.
Possible removal of a credit for parents whose children have an ITIN
The TCJA law of 2017 added a $500 credit that can’t be refunded. People with some kids who don’t qualify for the child credit can claim this credit.
Stay tuned, because we’ll keep giving you the latest news and information on these important changes to the law and how they might affect your family.
Sometimes it’s hard for families with kids who don’t have a proper Social Security number to get certain tax credits. A child must have a legal Social Security number in order to be eligible for the Child Tax Credit.