It’s been eight years since a Republican-led Congress approved the Tax Cuts and Jobs Act of 2017 (TCJA), which was at that point the most far-reaching tax legislation since 1986. Since then, we have seen seven major pieces of tax legislation passed, and with each new one there are more factors to consider and more rules to follow. With a Republican sweep in the 2024 elections, it is likely that new tax legislation is on the horizon.
Here is a summary of the major changes for 2025. Our 2025 Key Financial Data Card provides a handy reference for these changes.
Tax brackets increased
In 2025 the tax rates will be the same as in 2024. There are still seven federal income tax rates, which were set by the 2017 Tax Cut and Job Act: 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the tax brackets that determine how much income is taxed at each rate are indexed to inflation. Inflation was about 2.8% last year, and so the IRS increased its tax brackets by about 2.8% for each type of tax filer for 2025. This means a little more income will be taxed in lower tax brackets than last year.
Tax rates on long-term capital gains and qualified dividends generally are also unchanged, at 0%, 15% and 20%, but the brackets for the rates are also indexed for inflation, so the level of gain and dividend income that falls in each bracket increased.
Additional tax on net investment income unchanged
The net investment income tax (NIIT) of 3.8 is levied on the lesser of net investment income or modified adjusted gross income (MAGI) over $200,000 for single or $250,000 for married filing jointly. These amounts are not adjusted for inflation, so they remain unchanged from 2024. Net investment income includes taxable interest, ordinary dividends, capital gains and other income categories, and some expenses can be subtracted.
FAQS
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“Kiddie Tax” exemption increased
The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. The exemption from the kiddie tax for 2025 will be $2,700. A parent can elect to include the income on the parent’s return for 2025 if the child’s income is more than $1,350 and less than $13,500.
Tax deductions: Standard deduction increased
A hallmark of the Tax Cuts and Jobs Act was a high standard deduction and restrictions on itemized deductions. As a result, about 90% of all tax filers choose the standard deduction.
The standard deduction increases in 2025 to $30,000 for married-filing-jointly filers; $15,000, for single and married-filing-separately filers; and $22,500, for head-of-household filers.
Caps on itemized deductions remain unchanged. Taxpayers who itemize can claim a deduction for medical expenses if those expenses exceed 7.5% of adjusted gross income. The total deduction for property taxes, state and local income taxes, and state and local sales taxes (SALT) is capped at $10,000.
Retirement plan contribution limits increased
The total amount that employers and employees combined can contribute to a 401(k) or similar defined-contribution plan rises to $70,000 in 2025. The maximum annual employee contribution increases to $23,500. The catch-up contribution for people aged 50 and older remains at $7,500 in 2025. The limit on how much compensation can be counted under a qualified plan rose to $350,000. The annual benefit limit for defined benefit plans increased to $280,000.
“Super” catch-up contributions
Starting in 2025, individuals between the ages of 60–63 will be able to make a larger catch-up contribution of $11,250. This increased catch-up contribution is only available during the four years, after which the regular catch-up contribution of $7,500 is allowed for individuals aged 64 and older.
New parent withdrawals
Following the birth or adoption of a child, a new parent (or parents) may withdraw up to $5,000 each from his or her retirement account without incurring the usual 10% penalty on early withdrawals. Parents can make this withdrawal up to one year after the birth of the child and may put the money back into the retirement fund at a later date.
GUIDES
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Individual Retirement Accounts
In 2025, taxpayers can contribute $7,000 to a traditional IRA or Roth IRA, plus a $1,000 catch-up for those 50 and older. These amounts are unchanged from 2024.
Contributions to a traditional IRA are deductible for taxpayers who aren’t participating in a retirement plan at work. However, income thresholds limit the deductibility of such contributions. The income thresholds are slightly higher in 2025, due to IRS inflation adjustments.
Income thresholds limiting who can contribute directly to a Roth IRA are also sightly higher in 2025.
Roth IRA conversions
There continues to be no limit on the amount you can convert from a pretax retirement account, like a traditional IRA, into a Roth IRA. This transfer is taxable in the year you make the conversion, however once converted, the funds in the Roth IRA are not subject to income taxes. There are no required minimum distributions on Roth IRAs, and funds withdrawn from the Roth are not taxable.
Qualified Charitable IRA Distributions
Individual retirement arrangement (IRA) owners age 70½ or over can make tax-free distributions of up to $108,000 from an IRA directly to a qualified charity in 2025. The distribution will decrease taxable income and, for those who are at least 73 years old, QCDs count toward the IRA owner’s required minimum distribution (RMD) for the year.
Health savings accounts
The maximum deductible contribution to an HSA in 2025 is $4,300 for individuals. For family coverage, the maximum deductible contribution is $8,550, and there is a $1,000 catch-up contribution available for ages 55 and older.
In order to contribute to a Health Savings account, you must be enrolled in a qualifying high-deductible health insurance plan. The minimum annual deductible for a qualifying health plan is $1,650 for an individual plan and $3,300 for family coverage.
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Social Security
Social Security beneficiaries will receive a 2.5% cost of living adjustment to their benefits in 2025. The estimated maximum monthly benefit is $4,018 in 2025. The maximum taxable wage base in 2025 is $176,100. The tax rate on wages remains the same: 6.2% each for the employer and employee (12.4% for self-employed people). Social Security benefits will continue to be partially taxable, depending on your overall income. The income thresholds at which benefits are taxed depends on your “provisional” income, which is also known as “combined” income.
Medicare surcharges
in 2025 the income brackets used to determine Medicare premium surcharges for high-income retirees will be indexed to inflation. As a result, some retirees may experience an increase in their Medicare surcharge costs.
Estate tax and gift tax
The exclusion from estate, gift, and generation-skipping transfer (GST) is $13,990,000 in 2025. The top federal estate-tax rate remains 40%. These high lifetime exemption amounts are due to “sunset” at the end of 2025, at which time they are set to be cut approximately in half.
The annual exclusion of gifts one person can give to another without reporting it on a gift tax return increases to $19,000 in 2025. Payments for tuition and medical expenses are not subject to this limitation.
How to navigate the changes
Changes to tax laws, estate planning, retirement planning and investment planning are constantly happening. It pays to work with a financial advisor who you can trust to look after your best interest. At Blankinship & Foster, our Wealth Management service includes in-depth and proactive retirement and tax planning, specific to your unique situation, goals, and objectives. Contact us to learn more about how we can help bring clarity, confidence, and direction for your financial future.
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