2025 Income Tax Update

Every year, the formula for personal income taxes changes at least a little bit.  Some of these changes are made by Congress, and others are simply cost-of-living adjustments that the IRS calculates according to the tax code. 

The standard deduction for married couples filing jointly for tax year 2025 rises to $30,000, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction increases to $15,000 for 2025, up $400, and for heads of households, the standard deduction will be $22,500 for 2025, up $600 from the amount for 2024.  In addition, taxpayers aged 65 and over get a bonus of $2,000 to their standard deduction for singles and $1,600 each for married filers.

The tax rates remain the same as in 2024, but the level of income needed to be included in these brackets has increased.  The tax bracket income levels have all increased by just under 3%.  For example, for married filers to stay in the 12% bracket, they will need to keep their income under $96,950 in 2025 compared to $94,300 in 2024.  The tax rates for ordinary income are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Contribution limits to Health Savings Accounts and retirement accounts have also been increased for 2025.  HSA limits have increased from $4,150 to $4,300 for single taxpayers and up to $8,550 from $8,300 for families.  In addition, taxpayers 55 or older can contribute an extra $1,000 to their HSA accounts. 

Traditional and Roth IRA contribution limits remain the same as in 2024.  The limit is $7,000 per person.  Those who are aged 50 and over can contribute $8,000 this year.  Taxpayers can contribute to either Traditional or Roth IRAs, or both, if the total contribution does not exceed these limits.  However, you or your spouse must have earned income equal to or greater than the amounts contributed.

The income limit needed to make Roth IRA contributions has also been adjusted.  In 2024, married taxpayers can make full Roth IRA contributions up to $236,000 of income with a phaseout amount available up to $246,000.  Single filers reach the phaseout of the Roth contribution ability from $150,000 to $165,000. 

The limit on employee contributions to a 401(k) is now $23,500 instead of $23,000 last year.  Those aged 50 and older can defer an additional $7,500 to increase the total to $31,000.  Simple IRA contribution limits are up from $16,000 to $16,500, with a $3,500 catch-up bonus for those 50 and over.  SEP IRA contribution limits have increased from $69,000 to $70,000.

For those interested in making gifts to family or friends, the annual gift tax exclusion has jumped from $18,000 to $19,000 in 2025.  This is the amount any individual can gift to another individual without triggering a gift tax or even requiring a gift tax return.

On the flip side, the Social Security wage base has also been indexed to inflation.  This is the amount of earned income that is subject to Social Security taxes before the tax doesn’t apply.  The wage base has increased to $176,100, up from $168,600 in 2024.  If you have already started Social Security benefits but have not reached your full retirement age, the amount of earned income that you may receive before triggering any penalties is now $23,400 for the calendar year 2024.  Above that threshold, one dollar in benefits will be penalized for every $2 earned.

The last major tax bill was the Tax Cuts and Jobs Act of 2017, sometimes referred to as the Trump tax cuts.  This legislation cut taxes for most taxpayers and simplified the tax return process by significantly increasing the standard deduction.  The percentage of taxpayers who itemize deductions is now 10% compared to 30% before the changes in 2017.  The tax bill also reduced tax rates across the board, capped the state and local income tax deduction to $10,000, and placed limits on the mortgage interest deduction.  This tax bill is scheduled to expire after the 2025 tax year.  However, with the inauguration of President Trump as well as the new Congress being led by the Republican party that championed this bill, it seems likely that many of the provisions will be renewed before the end of the year.

As always, we will provide our clients with annual tax planning updates based on their specific situations.  If you would like to see the impact of these changes, please let us know, and we will prepare a customized tax projection for you.