The 2025 Tax Inflation Adjustments Are Here
2025 Tax Inflation Adjustments – Every year around Halloween, the Internal Revenue Service (IRS) gives taxpayers a treat when they formally announce inflation adjustments for over 60 tax provisions. These adjustments affect individual tax brackets, retirement contribution limits, annual gifting limits, and more.
These indexed amounts are meant to ease taxpayer burdens due to the cost-of-living increase over the prior year. And while the rate of inflation has drastically cooled since its recent high, so have the 2025 tax adjustments. The overall increase this year is approximately 2.8%, which is about half of the increase from the prior year.
However, there are still many noteworthy changes to be aware of for 2025 that may provide you with additional tax savings opportunities and allow you to save more for retirement.
Standard Deduction
Under the current tax law, a majority of taxpayers claim the standard deduction when they file their tax returns every year. This deduction allows taxpayers to reduce their income subject to tax by a pre-determined amount.
For 2025, the standard deduction amounts will increase to $30,000 for married couples who file jointly, up from $29,200 in 2024. The standard deduction will increase to $15,000 for single filers in 2025, up from $14,600 in 2024.
While this increase will be beneficial for millions of individuals, taxpayers won’t see any benefit from this increase until their 2025 tax returns are filed in 2026.
Retirement Contributions
Saving for retirement is important for everyone, regardless of your age. Whether you contribute to an employer-sponsored plan or an individual retirement account, the inflation adjustments for 2025 allow you to build up your nest egg more than ever before.
Employer-Sponsored Retirement Plans – 401(k), 403(b), 457(b)
Annual contributions to a qualified plan have increased to $23,500, up from $23,000 in 2024. Additional catch-up contributions for individuals ages 50 or older remain the same at $7,500.
Starting in 2025, taxpayers who reach age 60 through 63 as of December 31, 2025, may be eligible to make a catch-up contribution up to $11,250. This higher catch-up means that eligible taxpayers can contribute up to $34,750 in total to their employer-sponsored retirement accounts. This special increase is brand new for 2025, so be sure to check with your employer to see if they permit this.
Retirement contributions can generally be adjusted through your payroll provider at any point during the year. Check your elections to make sure they’re still suitable for your personal needs and goals. Spreading out your contributions evenly throughout the year allows you to buy into the market at different times, which may help with the impact of market volatility.
Traditional and Roth IRAs
Individuals who contribute to traditional or Roth IRAs won’t see any increases in contribution limits this year. The limit on annual contributions to an IRA remains the same as the prior year at $7,000. The additional catch-up contribution for individuals ages 50 or older also remains the same at $1,000.
While the annual contribution limits did not increase this year, the IRS did adjust the income limits for those taxpayers eligible to make a Roth IRA contribution. A maximum Roth IRA contribution can be made if modified adjusted gross income is less than $150,001 for single filers and $236,001 for married couples filing jointly. When your income starts to exceed these amounts, the eligible Roth contribution starts to phase out. If you’re close to these limits, be strategic about any Roth contributions.
Estate and Gift Tax Adjustments
Starting in 2025, the IRS allows you to give away up to $19,000 per person, completely tax free (up from $18,000 in 2024). This means that married couples can give up to $38,000 a year outright to any one individual, without any concern for tax ramifications.
Any gifts made above these amounts may be subject to what’s known as the federal gift tax. This tax applies to all gifts of property (including cash) made by an individual during the year that exceeds a person’s lifetime exemption. This lifetime exemption can also impact an individual’s taxable estate, so it’s important to be mindful of these amounts when gifting.
Beginning January 1, 2025, a married couple can transfer a combined $27,980,000 of wealth, free of gift and estate tax. This is up from $27,220,000 in 2024. A single taxpayer can transfer $13,990,000, which is up from $13,610,000 in 2024. Be aware, these exemption amounts are currently set to revert to $5,000,000 per person, indexed for inflation, beginning in 2026.
Gifting can be a valuable estate planning strategy used to intentionally reduce the size of a person’s taxable estate. Gifting assets to loved ones not only removes the assets from a person’s estate, but also removes any future appreciation on those assets as well. This strategy can help limit or eliminate any potential estate tax that would be owed upon a person’s death.
Increased Tax Deductions, Bracket Changes, and More!
There are several other tax provisions that get adjusted for inflation each year, including deductions, credits, and even tax brackets. While many of these increases do not require any action by taxpayers, it is good to be aware of these changes as they may impact your overall tax situation. Here are a few of these key beneficial changes for 2025:
Tax brackets for 2025 will increase by approximately 2.8% over the prior year.
- For example, the top tax rate of 37% will now apply to single filers with incomes greater than $626,350, up from $609,350 in 2024. The 37% tax rate will apply to married filers with incomes greater than $751,600, up from $731,200 in 2024.
Flex Spending Accounts will allow employee salary reductions for contributions in the amount of $3,300, up from $3,200 in 2024. Flex savings accounts allow individuals to use tax-free dollars to pay for medical expenses that are not covered by other health plans.
The Social Security Administration announced that Social Security and Supplemental Security Income benefits will increase by 2.5% starting in 2025.
- To help fund this increase, the maximum amount of earnings subject to Social Security taxes will now be $176,100, up from $168,600 in 2024.
With year-end quickly approaching, now is a good time to make sure you are taking advantage of the limits available to you. It’s also a perfect time to be proactive and plan ahead for the increased 2025 limits that may allow you to save more for your future. Reach out to your financial advisor to help you understand what these increases may mean for you.
Joseph P. Marmorato
Private Client Group Planner
CPA