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 as well as the income threshold to avoid the marriage penalty tax.
2024 Income Tax Brackets
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%.
The income levels are based off taxable income, not gross income or adjustable gross income. Taxable income is arrived by subtracting standard or itemized deductions – whichever is greater – from your adjustable gross income (AGI).
2024 And 2023 Income Tax Thresholds For Single Filers
As a single filer, the ideal W2 income amount for 2024 is a taxable 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 taxable 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. Of course, your overall effective tax rate will depend on your deductions and other tax-reducing moves.
2024 And 2023 Income Tax Thresholds For Married Filers
For married filers, the ideal taxable 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 an adjustable gross income of $428,900, but a taxable 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 $731,201 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 $365,600 in taxable income, 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 $365,600 ($731,201). 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.
The marriage penalty tax is a 2% greater tax on all income between $731,200 to $1,218,700. At the maximum income of $1,218,700, that's an extra $9,750 in taxes you have to pay.
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 taxable income of $731,201 or less. You'll still be paying an onerous 32% marginal federal income tax rate on earnings between $383,900 – $487,450 and 35% marginal federal income tax rate between $487,451 to $731,201. However, at least you will be treated fairly by the government.
Alternatively, if your combined taxable income is greater than $731,201 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 taxable income is looking to surpass a taxable income of $731,201 in 2024, one spouse can make less or even retire early. For example, one spouse could earn the entire $731,201 while the other spouse earns $0 to keep their federal marginal income tax rate at 35%.
You can play with this marriage tax calculator by the Tax Policy Center.
Revisiting The High Single-Income Household
In the case of the Chens household, 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 and pay zero taxes.
Sample Budget For The Ideal Income For A Married Couple In 2024
$383,900, the ideal taxable 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 taxable income of $383,900 to pay a maximum 24% federal marginal income tax rate. If both my wife and I were working full-time jobs, a combined gross income of $458,100 is what we'd shoot for.
A Great Household Income For A Nice Life
I think this is a great lifestyle if both parents are working jobs they enjoy with reasonable hours. After a 10+-year careers, there are more opportunities to earn up to $229,050 each or various permutations to come up to a total gross income of $458,100 and a taxable income of $383,900.
The couple is 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.
Of course, the couple doesn't have to earn a taxable income of $383,900 to live a great life. It's just a target to shoot for for 2024 and beyond.
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.
Why Is Up To The 24% Federal Marginal Income Tax Rate Ideal?
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 work for more money at this stage in my life. Here are reasons why I think paying up to 24% is ideal:
- You make enough to live a great life and provide for your family
- The marginal income tax rate is high enough where you feel good contributing to society
- You don't feel bad paying up to 24% because you still get to keep more than three times your income
- Depending on the industry, you may not have to work long hours to earn the income that pays a 24% tax rate
And if you're wondering, the rich do pay their fair share of income taxes. In 2021, the top 1% of income earners in America accounted for “only” 26% of the country's total income, yet they shouldered 46% of the total tax burden.
Stages Of Your Life Matter For Paying Taxes
When I was in my 20s and 30s, I was OK 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. It didn't feel good paying such a high tax rate, but it was the price I was willing to pay.
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.
Therefore, the federal marginal income tax you're willing to pay may be dependent on your age, energy, and level of wealth. Ironically, the chances of you paying a higher marginal income tax rate goes up the older you get.
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 $99,814 divided by the taxable income of $383,900 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 single rates.
Ways To Reduce Your Income Tax Bill
If you're a W2 earner looking for ways to reduce your income tax bill, here are some ideas you can look more into.
- Ask about a Non-qualified deferred compensation plan (NQDC). An NQDC lets you defer a percentage of your compensation for the future
- Max out your 401(k). Here are the 2024 401(k) and IRA contribution limits as well. The higher your federal marginal income tax bracket, the more you should max out your tax-deferred 401(k) plan.
- Set up a Donor Advised Fund (DAF)
- Donate 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
The backdoor Roth IRA requires paying taxes up front for potential tax savings in the future.
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 actually 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 your money in income taxes.
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?
Suggestions
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Note: I'm not a tax professional, only a tax enthusiast. Consult a tax professional before making any tax decisions. If you see something wrong with the numbers, feel free to point it out and I'll correct it.
“Please note: a married couple could earn an adjustable gross income of $428,900, but a taxable income of $383,900 after deducting $45,000 for two 401(k) contributions, to limit their federal marginal income tax rate to 24%.”
Don’t forget about catch-up contributions for those 50 and older, can deduct $61,000 (and 46,000 for 2024 if not)
Yes, good call. Thanks.
Sam – helpful article, but I’m not sure I really agree with this concept of an “ideal income.” While it’s true that Federal income taxes increase from 24% to 32% at $192K for single filers and $384K for joint filers, it is also true that these are the same income levels where you generally stop needing to pay 6.2% social security tax. So the net increase in your overall tax burden for income over $192K for single filers or $384K for joint filers is really more like 2% as opposed to 8%.
Sure, ideal is subjective. I want to give people a way to think about what an ideal income could be based on tax rates.
What’s your ideal income?
What rate are you using for the mortgage amount? Can’t be today’s rates or the principal on the $2.4M home is much lower.
True and good observation. The household bought several years ago with mortgage rates were lower.
Something like 80% of mortgage holder have a mortgage rate below 5%. While 42% of homeowners don’t have a mortgage at all.
A few other comments have touched on this — I feel like you overlooked a lot in the area of child care. If you are paying for preschool, who is picking up/taking care of the preschooler at the end of the school day? How are 12-year-olds getting to their ballgames, play practices, piano lessons, tutors, etc. … does this assume parents are working from home or grandparents are living with the family? Who is around at night when these high-earning parents are at client dinners and conferences? I’m not asking these questions to be cynical, but we are a family similar to what you have described, and these are real costs for us that change (but don’t necessarily go away) as our children age.
Can you elaborate your point? The answers to your question seem obvious: the parents. And if not the parents, then the relatives or the nanny. Who else would drive the kids?
Since 2017, I have provided transportation for my kids to 99% of my events.
It’s 5:52 am right now and I’ve been working since 5:15 am. I’ll stop at 7:30 am to help with wakeup, breakfast, get ready, then I will drive my son to school at 8:05 am and back by 8:45am. From 9 am – 4 pm -4:40 pm, I have the time to work, play, or do whatever.
Then I will pick him up after school. I’m always going to make time for my children no matter what. The days are long, but that’s what we signed up for for 18 years. Two parent household makes it easier to tag team.
Is your issue that the costs in my budget should be HIGHER? Or that it’s impossible for a parent to work a lot and take care of their kids?
I’m trying to understand my blind spot here. Thanks.
Maybe Lynn expects others to take care of her kids? I don’t get it either.
Another great article Sam! Looking at your family’s expenses, only having $212.00 left over monthly while living in a high cost of living area is cutting it razor close. I assume your family has both an emergency fund and savings built up to cushion any unexpected expenses or higher than expected spending for a particular month.
The budget isn’t my family expenses, but something I could seem ourselves spending with the ideal $383,900 taxable income amount.
If it was my budget, I would be worried because I’m purposefully spending/investing everything I have. I’ll always have liquidity by selling assets.
I intentionally reduced my gross income by 50%. Because I have no bills, I did notice the difference. The best part is my taxes went way down. Last year I got a $43,000 refund. That never happened to me before. Once I no longer needed to support my 2 children, I realized how little money my wife and I need. It’s a fools game to chase money. The other way to go is get rid of your bills.
” Once I no longer needed to support my 2 children, I realized how little money my wife and I need.” Thanks for sharing! With an affordable place to live, health, healthcare, and no debt, it doesn’t require much to be happy.
In terms of salary keeping up with inflation, it’s interesting how once you pass a certain income level inflation actually ends up being a net positive to build wealth. For example:
Say a person is making 50K and inflation is 17% over three years. They get an 18% raise to keep pace for a new salary of 59K (+9K). Another person makes 100K with the same 18% raise and makes 118K (+18K). One probably barely breaks even with the increased cost of everything while the other actually comes out ahead. During an inflationary environment, high salaries really come out ahead (assuming raises keep pace with the inflation). 150K turns into $177,000 (+27,000), etc. I guess it’s why the saying goes, “the rich get richer.” Also, explains why the middle class is struggling.
This presumes that one gets raises. Not everyone does.
Correct. It’s why I said: “assuming raises keep pace with the inflation” (as a percentage).
It’s easy to show tables on how not to earn more than an x amount but if you are a W2 employ or not, your income is dictated by your employer or, if you are a doctor, your practice. You can’t work less if everyone else is working a set amount. Then what do you do?
The author wrote “As a single filer, the ideal W2 income amount for 2024 is a taxable 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.”
The author appears to not understand how marginal tax brackets work.
You pay 24% on the money you make IN THAT TAX BRACKET. Then you pay 32% only on the money you make IN THAT TAX BRACKET. So if $10,000 of your income happens in the 32% bracket, you pay $3,200, but every you made before that is taxed at the 24% rate. That’s what it means when we talk about MARGINAL tax brackets. The author doesn’t know what they’re talking about and needs to completely rethink whether they should be giving financial advice when they don’t understand something so basic.
(And to the author, I’m sorry to be rude, but this is basic stuff and you’re perpetuating a myth that causes harm when people turn down raises to “keep their taxes low.”)
It’s OK to be rude, but do you really not understand what I wrote about the marginal income tax brackets and how they work?
I don’t want to pay a 32% marginal income tax on dollar made above the 24% income threshold. Therefore, I’ve identified the ideal income amounts for singles and couples.
I think most understand how the marginal income tax works. But you understanding and not thinking I understand is a good example of why I really need to simplify my writing and add more clear examples.
Then I can get my iPod across, someone who understands marginal, income tax, bracket, then I am failing as a communicator.
Weird Michael thinks you don’t understand how marginal income tax rates work. Seems clear to me.
Maybe he has reading comprehension issues even though he understands marginal taxes.
Sam, those brackets are based on taxable income which is AGI minus standard (or itemized) deductions and other subtractions from income. This means that senior couples like us (65+) can go up to $400K in AGI in 2023 and about $435K in 2024 and still be in the 24% tax bracket. This also means that retired seniors under $125K in AGI in 2023 and $135K in 2024 could fall into the 12% taxable income bracket and receive the benefit of 0% tax on dividends and long-term capital gains. Additionally, residents of Florida, Texas, Tennessee, Nevada, South Dakota, Alaska and Wyoming pay ZERO income tax. Two states: New Hampshire and Washington levy taxes on investment income only.
Thanks Ed, I updated the post to make it clearer. Using taxable income is the right wording.
For senior couples turning 63 in 2024 and planning to take “regular” Medicare when turning 65 in 2026, make sure your modified adjusted gross income (MAGI) is under the 2024 MAGI (for 2026 Medicare premiums) threshold of $206k. Please note your MAGI includes the NON-TAXABLE portion of your Social Security income. Adjusted gross income (AGI) only includes the TAXABLE portion of your Social Security income. It is your MAGI that is used to determine if you are subject to the income-related monthly adjustment amounts (IRMAA) that are added on top of the standard Medicare Part B AND Part D premiums if your MAGI is over the relevant threshold.
The catch is, they use your MAGI from TWO YEARS AGO to determine if you have to pay IRMAA in the next year (i.e., your IRMAA for 2024 is determined using your MAGI from 2022).
Before I started collecting Medicare this year (2023), for our annual tax planning purposes I only paid attention to our taxable income with little concern regarding our AGI, and absolutely no thought whatsoever about our MAGI. Then I got hit with the IRMAA, and kicked myself since we had not exceed the IRMAA threshold by all that much. We could have done without those funds to avoid higher monthly Medicare premiums for an entire year. Now when I do our tax planning I pay MUCH MORE attention to our MAGI. LOL
Good points for retirees to manage tax planning and Medicare IRMAA.
If I have a sole proprietorship that generates income and also a w2 job, Is it a good idea to hire my children and pay them up to the limit of $11,600 each to do things like lawn maintenance? This would reduce my taxable income at 24% down to 10% on that money.
Thank you for your analysis – provides sadly needed clarity
as well as methods to modify for individual situations
WELL DONE
That is one boojie budget.
I work even though my spouse already earns enough to put us in the highest marginal bracket, but we live in a state with lower taxes than NY, so the government doesn’t quite take more from me than I make. I do it because, after many years of toiling away in larger organizations, I now have a very flexible career and can set my own hours and work from wherever I want. I enjoy my work and not being completely reliant on my spouse. If work wasn’t something I enjoyed, we’d rethink the arrangement, but as it stands, I like my work, and I don’t feel guilty about all the extra help we have right now, including a regular housecleaner and a mother’s helper who helps with driving the kids to their activities and also with meal prep, grocery shopping/putting away, keeping the house organized, laundry and cooking for us as needed.
Hi Sam,
How is a backdoor roth reduce taxes when you have to pay taxes on those funds?
I have W2 and have BD roth. I look forward to your reply. Have a great day!
Thanks
Matt
Potentially on the backend. But, definitely not short term. Will clarify.
Thanks Sam,
Always interesting to read your breakdown and f expenses in theses cities. As a data point my car payment 0% for a Honda HRV is over 400/month. Also as kids get older in theses areas traveling athletics, more smart phones, orthodontics, snacks, 3rd cars and clothes really can add up.
Marie
Thanks for going beyond the basic data and providing such helpful insights on the marriage penalty tax and ideal income.
I’ve been confused when trying to understand the marriage penalty tax before, but understand it so clearly now with the 2024 figures, thank you! Super helpful.
And great analysis on the ideal income. 24 to 32% really is a huge jump up in tax rates.
Yes, going from 24% up to 32% is a HUGE jump in the tax rates. I try to keep us under 22%, since we live in a HCOL state with a high state income tax. Going from 22% up to 24% isn’t that bad – but would likely put us over the Medicare premiums IRMAA threshold, so I’ll stick with trying to stay under the 22% threshold. ;)