The 16-bit limitation is in PortAudio, a third party library that Audacity uses to communicate with the computer sound system. As far as I’m aware this limitation still exists when using Windows drivers. However it is worth noting that the dynamic range of 16 bit audio is 96 dB which is likely to be significantly greater than the Signal to Noise Ratio (SNR) of the analogue signal that is being recorded.
If the SNR of the input signal is, say 80 dB (which is very good) and the peak recording level is set to -6 dB, then the “top” bit (MSB) of the 16 bit data is unused, which leaves 15 bits to represent the signal. 15 bits has a dynamic range of about 90 dB, so the “bottom” bit (LSB) will be down in the noise floor and will essentially be random. A greater bit depth will provide extra bits that are down in the noise, so for 24-bit recording, rather than having 1 bit of random data you will have 9 bits of random data.
The big benefits of 24-bit recording are:
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When recording from a very high quality source that has substantially better than 70 dB SNR (for example, a Neumann TLM 67 Condenser Microphone has a SNR of around 94 dB SPL A-weighted, and a price tag of around $2000 US). For this quality of sound source 16-bit format is just not quite enough. Mind you, unless you have an extremely good recording room, the bottom few bits of a 24-bit recording will probably be recording next doors fridge.
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24-bit recording allows a huge amount of extra head room. When recording live musicians, the peak recording level can go dramatically higher than expected. If the recording engineer has only allowed 6 dB of head room, then one overly loud note could mean a retake of the entire track. With 24-bit recording the engineer can leave a generous 20 dB of headroom, and still have as much dynamic range as 16 bit running to the limit.
Limitations of 24-bit recording.
There are currently no sound cards available that can produce full 24 bit resolution. The very best sound cards can only manage 23 bits, and the bottom (LSB) is rubbish (random noise).
24 bit recording used 33% more data, which increases disk usage, memory usage and CPU usage. For multitrack projects especially this can reduce performance.
Many programs do not natively support 24 bit audio.
Processing 24-bit data is lower quality and slower than processing 32-bit float. If you are recording 24-bit data it is generally still better to record the data into a 32-bit (float) track.
Conclusions:
If you have 24 bit recording available, then by all means use it. Unless you are short of disk space or are producing very large or complex projects it is unlikely to do any harm. On the other hand, for many recording jobs it is unlikely to have any benefits at all over 16 bit, providing you take care with setting your recording level.