From political debates to small talk at the grocery store, inflation has been a hot topic of conversation for several years now. So, it should come as no surprise if your clients have a few questions about inflation as well. Fortunately, you can likely share some good news with them – at least when it comes to taxes and inflation.
Of course, as a small business owner, inflation affects you as well, and you may need to consider higher preparation fees and different payment options to keep your business thriving. To help you navigate client conversations and run your business, here are five reasons tax pros should know and care about inflation.
How does inflation affect taxes?
Just as the Federal Reserve may raise interest rates in response to inflation, the IRS acts as well. When inflation stays high over a long time, the IRS usually adjusts tax brackets, the standard deduction, and other tax provisions to reflect the change. In fact, in November 2023, the IRS announced adjustments to over 60 tax provisions for the 2024 tax year.
These adjustments typically benefit taxpayers, helping to slightly lessen the blow that inflation has already dealt to their pocketbooks.
Reason #1: Federal tax brackets and inflation
The federal tax brackets are adjusted yearly, and these adjustments are typically larger in response to significant inflation. The rates for tax year 2024 are as follows:
- 37% for incomes over $609,350 ($731,200 for married couples filing jointly).
- 35% for incomes over $243,725 ($487,450 for married couples filing jointly)
- 32% for incomes over $191,950 ($383,900 for married couples filing jointly)
- 24% for incomes over $100,525 ($201,050 for married couples filing jointly)
- 22% for incomes over $47,150 ($94,300 for married couples filing jointly)
- 12% for incomes over $11,600 ($23,200 for married couples filing jointly)
- 10% for incomes of $11,600 or less ($23,200 for married couples filing jointly).
These upper thresholds for each tax bracket are higher than they were for 2023 and previous years, meaning many taxpayers may end up in a lower tax bracket and enjoy a small reduction in their overall tax rate.
For example, a married filing jointly couple who made $94,000 in 2023 would have been in the 22% tax bracket range. If they make the same amount in 2024, they’ll fall into the 12% tax bracket.
(Note: If you’re delivering this welcome news to your tax clients, be sure they understand the difference between marginal and effective tax rates, or they may expect more savings than they’re actually getting. While their marginal tax rate may decrease from 22% to 12%, the decrease in their effective tax rate will be much more modest.)
Reason #2: Tax deductions and inflation
Several deductions are also adjusted in response to inflation, the most important of which is the standard deduction, which allows taxpayers who are not itemizing deductions to reduce their overall taxable income. For married couples filing jointly in 2024, this amount will increase by $1,500 to $29,000. For single filers, it will increase by $750 to $14,600, and for heads of household, it’s up $1,100 to $21,900.
Reason #3: Client IRA and 401(k) contributions
Maximum contribution limits for IRAs and 401(k)s often increase in response to inflation, enabling taxpayers to decrease their taxable income. For 2024, the maximum employee contribution for a 401(k) is $23,000 (up from $22,500 in 2023).
For IRAs, the upper limit is $7,000 (compared to $6,500 in 2023). While these adjustments are modest, they will be of interest to clients who want to max out their retirement savings each year.
Reason #4: You may need to adjust your fees
As a small business owner, you’re impacted by inflation just as much as your clients. Like thousands of other small business owners, you may need to increase your prices to continue to make ends meet. You can reference The National Society of Accountants Income and Fees Survey to see how your fees compare to those of other professional tax preparers.
Reason #5: Inflation affects clients’ discretionary spending
When clients have less discretionary income, they may have a harder time affording professional tax help. With bank products, you can offer more flexible payment options to these clients. They can elect to have your fee taken directly out of their refund, so they can pay you with no out-of-pocket cost.
Conclusion
Understanding how the IRS adjusts tax provisions in response to inflation can help you answer your clients’ questions and possibly deliver some welcome news about a lower tax bracket or higher deduction. Understanding how inflation could impact your own business is critical for setting your own rates and offering payment options that help you retain and attract clients.
