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On October 22, 2024, the IRS released new tax tables and guidelines for 2025. This article provides a comprehensive guide to the most important tax changes in 2025 that you and your clients need to be aware of, covering everything from estate tax exclusions to retirement account updates. Let’s dive into how these changes could impact your financial strategies.(1)
Standard Deductions
Good news for everyone! The standard deduction is getting a boost for 2025.
These increases mean your clients who do not itemize will receive more deductions in 2025. However, for those who do not itemize and are charitably inclined, this could mean they will receive minimal tax benefit from their charitable giving.
*Interested in optimizing charitable giving for tax purposes? Contact Dunham’s Business Development Team at (858) 964-0500 to learn how we can help your clients get the most out of their donations.
Tax Brackets
The IRS has adjusted the tax brackets for 2025 to account for inflation. Here is the breakdown for 2025:
Capital Gains Tax Rates for 2025
Capital gains tax rates in 2025 will remain the same - 0%, 15%, and 20% - but the income thresholds have increased:
2025 Capital Gains Tax Rates - Single Filers
- $0 - $48,350: 0%
- $48,351 - $533,400: 15%
- Over $533,400: 20%
2025 Capital Gains Tax Brackets - Married Filing Jointly
- $0 - $96,700: 0%
- $96,701 - $600,050: 15%
- Over $600,050: 20%
Child Tax Credit
The maximum credit remains at $2,000 per qualifying child, and the refundable portion stays at $1,700 for 2025
Qualified Business Income Deduction
Pass-through business owners should note these thresholds for the 20% deduction:
- Single filers: $197,300
- Married filing jointly: $394,600
Alternative Minimum Tax (AMT) Changes
The AMT exemption amounts for 2025:
2025 Alternative Minimum Tax (AMT)
- Filing Status: Single
- Exemption Amount: $88,100
- Phaseout Begins At: $626,350
- Filing Status: Married Filing Jointly
- Exemption Amount: $137,000
- Phaseout Begins At: $1,252,700
*Note: The AMT exemption phases out at 25 cents per dollar earned once income reaches the phaseout threshold.
Estate Tax Exclusion
This amount rises to $13,990,000, a $380,000 increase from 2024.
*Please see below for an important discussion on the sunset of the Estate Tax Exclusion.
Annual Gift Exclusion
The annual gift tax exclusion will rise to $19,000 per recipient in 2025, an increase from $18,000 in 2024. This is an excellent opportunity for your clients to gift more tax-free to family, friends, or beneficiaries.
Changes for Your Wallet - Transportation, Health FSAs, and Foreign Income
There are additional small but impactful changes in 2025:
- Transportation Benefits: The monthly limitation rises to $325 (up from $315)
- Health FSA Contributions: Increased to $3,300 (up $100)
- Foreign Earned Income Exclusion: Jumps to $130,000 (up $3,500)
What is Staying the Same?
Some things never change, and in 2025, that includes:
- Personal exemptions remain at $0
- No limitations on itemized deductions
- Lifetime Learning Credit phaseout remains at $80,000 ($160,000 for joint returns)
A Reminder of SECURE Act 2.0 Changes For Retirement Accounts in 2025
The SECURE 2.0 Act is bringing significant changes to IRAs and 401(k)s that could help boost your client's retirement nest egg. Here is what you need to know about these game-changing updates. (2)
Supersized catch-up provision for ages 60 - 63
If you are between 60 and 63, you can make extra-large catch-up contributions to your 401(k). The new limit is the greater of $10,000 or 150% of the 2024 catch-up contribution limit (indexed for inflation). This is a substantial increase from the standard catch-up contribution limit.
Automatic 401(k) Enrollment Becomes Standard
Starting in 2025, new 401(k) plans must include automatic enrollment. Here is how it works:
- Initial contribution: is 3-10% of salary
- Annual increase is 1% per year
- Maximum contribution is 10-15%. Do not worry. Employees can still opt out if they prefer not to participate.
SIMPLE IRA Gets a Boost
SIMPLE IRA participants aged 60-63 will see increased catch-up contribution limits in 2025:
- New limit: Greater of $5,000 or 150% of the regular age-50 catch-up amount
Annual adjustments for cost of living begin in 2026
Inherited IRA 10-Year Rule Takes effect
Most beneficiaries must empty inherited IRAs within 10 years. However, there are exceptions for:
- Surviving spouses
- Children under 21
- Disabled or chronically ill individuals
- Beneficiaries not more than 10 years younger than the deceased
Here is what you need to know about inheriting an IRA and the Required Minimum Distribution (RMD) rules. The critical date to remember is the Required Beginning Date (RBD), when the original IRA owner had to start taking money from their account. Most people's RBD is April 1 of the year after they turn 73.
If you inherited an IRA from someone who died after they reached their RBD, you must follow specific withdrawal rules. You will need to take annual Required Minimum Distributions (RMDs) from years one through nine, then withdraw all remaining funds in year ten.
However, the IRS recognized that these rules were causing confusion and provided temporary relief. If you inherited an IRA after January 1, 2020, the IRS granted a waiver on taking RMDs for 2021 through 2024. This four-year pause was designed to give everyone time to understand and adjust to the new rules. Regular RMD requirements will resume in 2025 when you must start taking these distributions if you fall under these rules.
New Inherited IRA Penalties
Starting in 2025, failing to take Required Minimum Distributions (RMDs) from inherited IRAs will result in a 25% penalty. The good news? You can reduce this to 10% by correcting the mistake promptly.
Important 2024 Year-End Reminders
Before you focus on 2025, make sure to hit these key 2024 tax deadlines:
- 401(k) contributions: December 31, 2024
- IRA contributions: April 15, 2025
- Review any excess contributions to avoid 6% penalties
- Take Required Minimum Distributions (RMDs) on time
Important Note About the Tax Cuts and Jobs Act in 2025
The Tax Cuts and Jobs Act (TCJA) of 2017 will expire at the end of 2025, bringing significant changes to gift and estate tax exemptions. A big change is that the lifetime gift exclusion is expected to drop from $13,990,000 to approximately $7 million in 2026.
This change could result in a 40% tax on the difference, potentially costing millions in additional taxes.
This sunset deadline may seem far away, but proper estate planning takes time. Estate attorneys will likely experience high demand as we approach the end of 2025, making it crucial to start planning now.
If you wait until mid-2025, you may find it difficult or impossible to find a qualified estate attorney and complete the necessary trust documentation before the tax changes take effect.
At Dunham, we can help you develop comprehensive trust and tax strategies to protect your assets from these impending changes. Contact the Dunham Business Development Team at (858) 880-5778 to discuss how we can help you protect your client's wealth.
Sources:
- IRS releases tax inflation adjustments for tax year 2025, The IRS, October 22. 2024,https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
- Key change coming for 401(k) 'max savers' in 2025, expert says — here's what you need to know, Katie Dore, CFP, October 17, 2024, https://www.cnbc.com/2024/10/16/catch-up-contributions-change-2025.html
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.