The changing dynamics of inflation not only impact the purchasing power of your dollar but also have a significant influence on Social Security benefits and tax provisions. Here’s a detailed look at how inflation will play a role in the adjustments for Social Security increases and income-tax provisions in 2024.
Expected Dip in Social Security COLAs
After an impressive 8.7% COLA for 2023, it’s anticipated that 2024 will see a reduction. The reason for this downward projection? A concerted effort by the Federal Reserve to rein in inflation. With their rate hikes in the last couple of years, the blow of inflation has been softened, translating to a probable Social Security COLA of around 3% for 2024.
How COLAs are Calculated
The Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) is the foundation upon which Social Security COLAs are based. The difference between the CPI-W from one year’s third quarter to the next determines the adjustment percentage. Current predictions peg this adjustment for 2024 between 3 and 3.5%.
For a clearer picture, let’s consider the numbers. With the average monthly Social Security retirement benefit hovering around $1,792, the predicted increase would mean beneficiaries could expect an extra $54 to $63 in their monthly checks.
Adjustments in Tax Bracket and Deductions
Inflation doesn’t just affect Social Security. It also nudges federal tax provisions. To avoid the dreaded “bracket creep,” these provisions are adjusted annually.
“Bracket creep” refers to taxpayers being moved to a higher tax bracket not because they’re earning more in real terms, but due to inflation. These adjustments ensure fairness.
How Inflation Alters Tax Brackets
Currently, seven federal income brackets are in play, and although these brackets will remain consistent, the dollar thresholds for each will witness a slight increase. The standard deduction is also projected to rise, indicating an increment of $900 and $1,800 for singles and married couples filing jointly, respectively.
Capital Gains Tax and Earned Income Tax Credit
Tax rates on long-term capital gains will hold steady. However, the income parameters defining these rates will adjust upwards. Additionally, the Earned Income Tax Credit amounts are set to marginally increase.
Federal Tax Collections in the Face of Inflation
Even with inflation’s relative cooling, the federal tax coffer hasn’t shown signs of dwindling. An astounding $4.9 trillion was recorded for the fiscal year ending in September 2022. This rise in collections, especially from individuals, can be attributed to the capital gains from a thriving housing market and robust stock market performance.
Relation to the Gross Domestic Product (GDP)
To understand the magnitude of these collections, one must look at the percentage of the GDP. The recent fiscal year saw federal tax collections making up 19.6% of the GDP, approaching the record set during the World War II era.