Tax Changes for 2025
Happy New Year! Let the new year resolutions begin! It’s always nice having a fresh start at the beginning of the year with new goals to work towards and a feeling of excitement around what’s ahead. To help set you up for the strongest start to contributing to your savings and investing goals this year, we want to make you aware of a few of the changes for 2025 that affect the majority of taxpayers.
Tax Bracket Adjustments
To keep up with inflation, the IRS has adjusted the tax brackets so that taxpayers pay the same amount of tax proportionate to inflation. Unless you were already at the top of your tax bracket and received a raise of over 2.8%, your income will not be taxed at a higher rate.
Standard tax deductions
The standard deduction will increase to $15,000 this year for single taxpayers and married filing separately. For married couples filing jointly, the deduction will increase to $30,000. Finally, for heads of households, the new standard deduction will rise to $22,500.
Itemized deductions
As has been the case for the past several years, itemized deductions remain unchanged, allowing unlimited itemized deductions to bring down your adjusted gross income, potentially dropping you into a lower tax bracket.
401k Catch Up Contribution Limits
Annual contribution limits for 401(k), 403(b), government 457 plans, and federal government Thrift Savings Plan have increased to $23,500 for those participating in the plans.
For participants who are age 50 and older are eligible to contribute catch up contributions of an additional $7500 for a total of $31,000 annually. What’s even more exciting, thanks to the SECURE 2.0 Act, is an even higher limit is given to employees between the ages of 60 and 63. That additional catch-up limit is $11,250 for a total contribution limit of $34,750.
To encourage more retirement savings, beginning in 2025, any 401(k) plan that has been established after December 29, 2022, will now be required to automatically enroll participants at a contribution rate between 3% and 10%. Employees can opt out of that enrollment or change their contribution limit if they choose to.
IRA Contributions
Although 401(k) plans had some generous increases, traditional IRA limits remain unchanged. The annual contribution limit for an IRA continues to stay at $7000 with a catch-up limit of $1,000 for individuals aged 50 and older.
Simple IRA Contributions
Once again, thanks to SECURE 2.0, individuals can contribute an even greater amount to their savings because of the increase to $17,600 for 2025. For employees 50 and older, catch-up contributions can amount to an additional $3,850 for a total of $21,450. The biggest increase of them all, is the catch-up amount of $5,250 for those aged between 60-63, for an overall total of $22,850.
Inherited IRAs
2025 will mark 4 full years of the 10-year rule being in effect for Inherited IRAs. The rule is written that if you have inherited an IRA from someone who passed on or after January 1, 2020, you must withdraw the entire IRA amount by December 31st of the 10th year following their death. There are categories of beneficiaries who exceptions to the rule:
- Surviving spouses
- Children under the age of 21
- Beneficiaries not more than 10 years younger than the deceased
- A disabled or chronically ill individual
During the initial transition period and quite a bit of confusion around the new rule, the IRS gave some relief by not enforcing penalties on those not taking RMDs from their inherited IRS. However, now that the grace period is over, beginning in 2025, a 25% penalty will be applied to individuals who did not take their RMD.
Annual Gift Exclusions
The annual gift tax exclusion for 2025 has been increased to $19,000. That means a person can give $19,000 (or $38,000 for married couples) to as many different people as they choose tax-free, without having to use up any of that taxpayer’s lifetime gift and estate tax exemption ($13.99 million currently). If you would like to surprise each one of your grandkids with a generous $19,000 this year, that can be done without any tax implications. Better yet, those assets will no longer be included in the taxpayer’s estate and the gifted assets’ future appreciation will not be subject to any gift and estate taxes either.
Now that you are well-versed in the latest IRS changes, head into 2025 with confidence! Get those New Year’s resolutions started and on track so you stick it out as long as you can! As your advisor, Meridian is here to help clarify the path for your specific situations and scenarios to maximize 2025 for you and your family so that you can enjoy the journey ahead.
From my family to yours, see ya 2024! Looking forward to seeing what 2025 brings