Inflation’s cooling off, and today the Federal Reserve reduced interest rates for the first time in four years. Interest rates were reduced by a half point (.50 percent). 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) raised interest rates 11 times to combat high inflation. These rate hikes were part of a broader strategy to cool down an overheated economy. However, on September 18, 2024, the Federal Reserve reduced interest rates for the first time in four years.
Looking ahead
So, what does the Fed’s decision to lower rates 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.
For you, this lower rate could mean lower interest rates on loans, mortgages, credit card interest, and savings.
There are a few ways the Federal Reserve lowering interest rates can impact your finances.
- It may cost less to borrow. Lowering interest rates could make loans like mortgages, credit cards, and auto loans tied to prime rates more affordable making it easier for you to purchase your dream home and pay less to borrow money.
- Student loans may become less expensive. Private student loans are tied to Federal rates, so your interest rates and payments on those could also decrease.
- Lower interest deductions. With interest rates being lower, you may find a lower mortgage interest deduction if you refinance for a lower rate or a lower student loan interest deduction if you have a private student loan, but you will still be able to lower your taxable income with these deductions.
IRS Adjustments for Tax Year 2024
Why it matters
While inflation is slowing, like every year, the IRS provides relief through several inflation adjustments for the 2024 tax year. The IRS announces incremental adjustments to certain tax benefits yearly due to inflation. Tax year 2023 was the biggest increase in inflation adjustments in decades at 7.1 percent. However, for tax year 2024, the adjustments were not as much as in tax year 2023, but there still have been substantial increases over the last two years due to the significant inflation experienced over the last couple of years.
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.
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.
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 reduce interest rates and the IRS inflation adjustments for tax year 2024 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!
At tax time, don’t worry about knowing these specific tax benefits. TurboTax will guide you through the tax deductions and credits you are eligible for or you can hand your taxes over to an experienced TurboTax Live tax expert who can do your taxes from start to finish.