Discussions about the tax code in the U.S. often focus on the ultra-wealthy or low-income earners.
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But sometimes with all the talk about raising taxes on the wealthiest Americans or expanding tax credits to help those on the other end of the spectrum, those in the upper middle class are unsure what all the changes mean for them. They often have a hefty tax bill, but they might not be aware of all the tax issues that affect them.
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What Defines the Upper Middle Class?
If going by households in the 60th to 80th percentile of household income, that would mean the upper middle class includes households with incomes between $89,745 and $149,131. But depending on factors like your city and state, as well as the overall economic environment, your view of what’s considered upper middle class might differ.
An Ameriprise Financial survey found that 60% of people with $1 million or more in investable assets consider themselves to be upper middle class, while only 8% say they’re wealthy. So, it’s not always clear what the upper middle class refers to.
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New Tax Rules
No matter how you define yourself, one tax change to keep in mind this filing season is that federal income tax brackets have gone up from last year.
“The inflation adjustments to 2023 tax figures were fairly significant, expanding tax brackets, the standard deduction, and retirement plan contribution limits. These could all result in reductions in income taxes unless the taxpayer’s income for the year has also increased corresponding to the inflation adjustments,” said Mark Luscombe, a certified public accountant (CPA) and principal analyst at Wolters Kluwer Tax & Accounting US.
For example, in tax year 2022, the 24% federal tax bracket ranged from $89,076-$170,050 for individuals, or $178,151-$340,100 for married couples filing jointly. For tax year 2023 — which applies to this current tax filing season — that’s gone up to $95,376-$182,100, or $190,751-$364,200 for married couples filing jointly.
Upper-middle-class taxpayers who have made energy-related improvements to their homes may also be eligible for more tax savings.
“The Inflation Reduction Act provided enhanced tax credits for energy-efficient home improvements, solar and wind installations, and new and used clean vehicle credits effective for 2023,” Luscombe said.
And those who want to pass on some of their savings to their children may have an easier time doing so without incurring taxes, both for this tax filing season and the upcoming ones.
For tax year 2023, the annual tax exclusion for gifts rose $1,000 to $17,000, and it did so again for tax year 2024, rising to $18,000. That could enable upper-middle-class taxpayers “to gift funds to children free of the gift tax. These limits could double for married couples,” Luscombe said.
Preparing For Future Tax Changes
In addition to making sure you’re ready for this current tax filing season, it can also help to look ahead to position yourself to optimize taxes.
For example,“the current law provides for a significant reduction in the unified estate and gift tax exemption in 2026. Taxpayers who are concerned about possible estate taxes under a lower estate tax exemption may want to consider starting a significant gifting program in 2024 and 2025 to take advantage of the current higher exemption amount,” Luscombe said.
But much could change, depending on what happens politically.
“Tax legislation that has passed the House but has not yet passed the Senate could provide some disaster relief for taxpayers, such as the ability to do penalty-free withdrawals from retirement plans, increased plan loan limits, and enhanced casualty loss deductions,” Luscombe said.
“Tax legislation is also likely to be considered addressing the expiration of many of the individual tax breaks in the Tax Cuts and Jobs Act that expire at the end of 2025. These actions could maintain higher standard deductions, tax bracket sizes, and the unified gift and estate tax exemption amount that otherwise would revert back to lower levels in 2026,” he added.
Entrepreneurs might also benefit from new tax legislation.
“For upper-middle-class taxpayers with businesses, the legislation could extend some provisions from the Tax Cuts and Jobs Act such as expensing of research and experimental expenses, raising the limitation on the business interest deduction, and restoring 100 percent first-year bonus depreciation,” Luscombe said.
However, not all the changes could help upper-middle-class taxpayers.
“A taxpayer-adverse provision in the legislation imposes some additional restrictions on claiming employee retention credits from the COVID period,” Luscombe said.
Overall, upper-middle-class taxpayers likely have several opportunities to reduce their tax liability based on these recent changes and could benefit from some proposed changes. However, it’s worth noting that keeping up with all these tax changes on your own can get confusing, and it could be worth hiring a professional to help you get all the tax breaks you’re entitled to.
“Upper-middle-class taxpayers tend to utilize tax professionals to prepare their tax returns which helps them avoid overlooking tax deductions,” Luscombe said.
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This article originally appeared on GOBankingRates.com: What the Upper Middle Class Needs To Know About Taxes for 2024
