Interest Rates, Inflation, and Your Taxes

Inflation’s cooling off, and the Federal Reserve is holding interest rates steady this summer. If you’re wondering how this impacts your wallet, your savings, and your taxes—you’re in the right place. We’ll explain how these changes affect your taxes and what IRS changes mean for you next tax season.

The Fed and Interest Rates 101

Recent moves

Since March 2022, the Federal Reserve (Fed) has raised interest rates 11 times to combat high inflation. These rate hikes have been part of a broader strategy to cool down an overheated economy. However, for the summer of 2024, interest rates have remained steady.  

Looking ahead

So, what does the Fed’s decision to hold rates steady mean for the near future? First, it’s essential to understand that these interest rate decisions impact more than borrowing costs. They also influence economic activity, employment rates, and inflation. The Fed aims to balance economic growth with inflation control by keeping rates steady.

For you, this could mean a period of relative stability regarding interest rates on loans, mortgages, and savings. However, staying informed is crucial as the economic landscape continues to evolve. Future decisions will depend on various factors, including inflation trends and economic performance.

IRS Adjustments for Tax Year 2024

Why it matters

While inflation is slowing, it remains the highest experienced in decades, which has been a challenge for many. To help provide relief, the IRS made several inflation adjustments for the 2024 tax year (TY24). The IRS announces incremental adjustments to certain tax benefits yearly due to inflation. Still, there were more substantial increases over the last two years due to the significant inflation experienced over the last couple of years.

Key Changes and Inflation Adjustments

Higher standard deductions

One of the most significant adjustments is the increase in standard deductions. For single taxpayers, the standard deduction goes from $13,850 to $14,600. For married couples filing joint tax returns, the standard deduction increased from $27,700 to $29,200; head-of-household filers increased from $20,800 to $21,900. This means a bigger reduction in your taxable income and a bigger refund or less taxes owed.

New tax brackets

The IRS has also adjusted the income thresholds for tax brackets. These changes mean you can make more money and be taxed less.

Expanded Credits

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) provides significant relief for low-to-moderate-income earners. The maximum credit has increased, providing more substantial benefits for millions of taxpayers. This adjustment helps ease the financial burden on working families, making it essential to understand if you qualify for this credit. Last tax year, approximately 23 million workers and families received EITC. For tax year 2024, the maximum EITC amount is $7,830 for families with three or more qualifying children. 

Other Benefits

Retirement contributions

The limits for 401(k) and IRA contributions have increased, allowing for more tax-advantaged savings. This is an excellent opportunity to boost your retirement savings and reduce taxable income. The contribution limit for employees who participate in a 401(k) plan increased to $23,000 ($30,500 if you are 50 and over). The limit for annual IRA contributions has increased to $7,000 ($8,000 if you are 50 and over)in 2024. 

Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA)

Higher contribution limits for FSAs and HSAs allow for more pre-tax savings on healthcare costs. Utilizing these accounts can effectively lead to significant tax savings and better financial health.

What’s Next?

With these changes in mind, let’s examine some actionable tips for maximizing your benefits and effectively planning for the next tax season.

Tax Planning Tips

Maximize deductions

Ensure you’re not paying more on your taxes than you have to. Track deductible expenses such as medical costs, charitable donations, student loan interest payments, and mortgage interest to lower your taxable income. Use apps and tools to track the costs and donations throughout the year to make tax time easier. Staying organized can save you a lot of stress and money when filing your taxes.

Stay informed

Regularly check for updates on tax laws and IRS announcements. Follow trusted financial news sources like the TurboTax blog and the TurboTax newsletter for tailored advice. Staying up-to-date with breaking tax news and updates you need to know can significantly impact your tax planning and financial strategy. 

Smart Financial Moves

Plan ahead

Start early with your tax planning. Consider how life events and changes, such as a new job, marriage, moving, or having a baby, might affect your taxes. Planning ensures you can take full advantage of deductions and credits available to you, making the tax filing process smoother and more efficient.

Savvy saver

Make the most of high-yield savings accounts and CDs while interest rates are favorable. Shop around for the best rates. By optimizing where you save your money, you can ensure your savings grow more efficiently and keep pace with inflation.

Boost your retirement savings

Increasing your retirement savings could help secure your future and provide immediate tax advantages. Remember, contributions to these accounts can significantly reduce your taxable income.

In summary, the Fed’s decision to hold interest rates steady and the IRS inflation adjustments for TY24 are good news for you. Understanding these changes and taking proactive steps can maximize your tax benefits and improve your financial health. Stay informed, plan, and make smart financial moves to take advantage of these changes.

Check back with the TurboTax blog for more tips and updates. Have specific questions? Stay proactive and informed!