Month: November 2024

The Internal Revenue Service recently announced updates to several amounts that are updated annually for inflation. The tax year 2025 adjustments described below generally apply to income tax returns to be filed starting tax season 2026.

The tax items for tax year 2025 of greatest interest to many, include the following dollar amounts:

• Standard deductions. For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024. For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for tax year 2024.

• Marginal rates. For tax year 2025, the top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly). The other rates are:

  • 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
  • 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
  • 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
  • 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
  • 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
  • 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).

• Alternative minimum tax exemption amounts. For tax year 2025, the exemption amount for unmarried individuals increases to $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350. For married couples filing jointly, the exemption amount increases to $137,000 and begins to phase out at $1,252,700.

• Earned income tax credits. For qualifying taxpayers who have three or more qualifying children, the tax year 2025 maximum Earned Income Tax Credit amount is $8,046, an increase from $7,830 for tax year 2024. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

• Qualified transportation fringe benefit. For tax year 2025, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking rises to $325, increasing from $315 in tax year 2024.

• Health flexible spending cafeteria plans. For the taxable years beginning in 2025, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements rises to $3,300, increasing from $3,200 in tax year 2024. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount rises to $660, increasing from $640 in tax year 2024.

• Medical savings accounts. For tax year 2025, participants who have self-only coverage the plan must have an annual deductible that is not less than $2,850 (a $50 increase from the previous tax year), but not more than $4,300 (an increase of $150 from the previous tax year).

  The maximum out-of-pocket expense amount rises to $5,700, increasing from $5,550 in tax year 2024.

  For family coverage in tax year 2025, the annual deductible is not less than $5,700, increasing from $5,550 in tax year 2024; however, the deductible cannot be more than $8,550, an increase of $200 versus the limit for tax year 2024. For family coverage, the out-of-pocket expense limit is $10,500 for tax year 2025, rising from $10,200 in tax year 2024.

• Foreign earned income exclusion. For tax year 2025, the foreign earned income exclusion increases to $130,000, from $126,500 in tax year 2024.

• Estate tax credits. Estates of decedents who die during 2025 have a basic exclusion amount of $13,990,000, increased from $13,610,000 for estates of decedents who died in 2024.

• Annual exclusion for gifts increases to $19,000 for calendar year 2025, rising from $18,000 for calendar year 2024.

• Adoption credits. For tax year 2025, the maximum credit allowed for an adoption of a child with special needs is the amount of qualified adoption expenses up to $17,280, increased from $16,810 for tax year 2024.

Unchanged for tax year 2025

By statute, certain items that were indexed for inflation in the past are currently not adjusted:

• Personal exemptions for tax year 2025 remain at 0, as in tax year 2024. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act of 2017.

• Itemized deductions. There is no limitation on itemized deductions for tax year 2025, as in tax year 2024 and preceding, to tax year 2018. The limitation on itemized deductions was eliminated by the Tax Cuts and Jobs Act of 2017.

• Lifetime learning credits. The modified adjusted gross income amount used by taxpayers to determine the reduction in the Lifetime Learning Credit provided in Sec. 25A(d)(1) of the Internal Revenue Code is not adjusted for inflation for taxable years beginning after Dec. 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).

The Internal Revenue Service recently announced that the annual contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $23,500 in 2025, up from $23,000 in 2024.

The limit on annual contributions to an IRA remains $7,000. The IRA catch‑up contribution limit for people aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment but remains $1,000 for 2025.

The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan remains $7,500 for 2025. Therefore, participants in most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plan who are 50 and older generally can contribute up to $31,000 each year, starting in 2025. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.

You can deduct contributions to a traditional IRA if you meet certain conditions. If during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced, or phased out, until it is eliminated, depending on your filing status and income. (If neither you nor your spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2025:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $79,000 and $89,000, up from between $77,000 and $87,000.
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $126,000 and $146,000, up from between $123,000 and $143,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $150,000 and $165,000 for singles and heads of household, up from between $146,000 and $161,000. For married couples filing jointly, the income phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $79,000 for married couples filing jointly, up from $76,500; $59,250 for heads of household, up from $57,375; and $39,500 for singles and married individuals filing separately, up from $38,250.
• The amount individuals can generally contribute to their SIMPLE retirement accounts is increased to $16,500, up from $16,000. Pursuant to a change made in SECURE 2.0, individuals can contribute a higher amount to certain applicable SIMPLE retirement accounts. For 2025, this higher amount remains $17,600.
• The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most SIMPLE plans remains $3,500 for 2025. Under a change made in SECURE 2.0, a different catch-up limit applies for employees aged 50 and over who participate in certain applicable SIMPLE plans. For 2025, this limit remains $3,850. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in SIMPLE plans. For 2025, this higher catch-up contribution limit is $5,250.

If you would like help determining your eligibility for any of these programs, please contact our office. We would be happy to help.