The IRS has made its 2025 tax adjustments, but will these changes affect your tax strategy for the coming year? With a number of amendments introduced around tax rates, deductions, and credits, it’s crucial that your tax planning takes these into account. That way, you can save time and money over the coming year.
In this blog, we’ll take an in-depth into all the tax changes that have been introduced, and what they mean for your personal taxes.
Inflation-Adjusted Tax Brackets for 2025
The first of the 2025 tax adjustments concerns the income tax brackets, which have changed to account for inflation. This was done to prevent ‘bracket creep’, or moving into higher tax brackets due to inflation-driven income increases. With these adjustments, the IRS hopes to ensure fairness for all taxpayers.
The top tax rate remains unchanged at 37% for individual taxpayers with incomes over $626,350 (or $751,600 for married couples filing jointly). However, below are the new rates:
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
- 32% for over $197,300 ($394,600 for married couples filing jointly).
- 24% for over $103,350 ($206,700 for married couples filing jointly).
- 22% for over $48,475 ($96,950 for married couples filing jointly).
- 12% for over $11,925 ($23,850 for married couples filing jointly).
- 10% for $11,925 or less ($23,850 or less for married couples filing jointly).
The key change here is for married couples filing jointly, in which the 12% bracket applies to income up to $96,950, while the 22% bracket now spans from $96,950 to $206,700.
So what does this mean for you? Essentially, if you’re a middle-income taxpayer, you’ll benefit from wider brackets, and avoid entering a higher tax bracket if you’ve gotten a modest pay raise. At the same time, higher-income earners might have less income taxed at the highest marginal rates. This means you may be able to save more, depending on your income level.
But these aren’t the only 2025 tax adjustments you need to be aware of.
Higher Standard Deduction Amounts
The IRS also announced 2025 tax adjustments for the standard deduction. In 2025, this will increase to $15,000 for single filers, and $30,000 for married couples filing jointly.
In practical terms, this will impact your decision of whether to take the standard deduction on your taxes, or itemize them instead. The former is generally simpler, because you don’t need to track and document expenses like medical bills or charitable donations. Similarly, the increased standard deduction means you might see a larger reduction in your taxable income without itemizing.
But if you have high deductible expenses, like significant medical costs, mortgage interest, or state and local taxes, you may benefit from itemizing. Also, if you regularly donate large amounts to qualifying charities, itemizing will probably be more beneficial than the standard deduction.
Changes to Tax Credits for Electric Vehicles
Under the Inflation Reduction Act (IRA), the IRS introduced a number of rules for electric vehicle tax credits. The idea was to encourage environmentally friendly purchases, while ensuring tax fairness. In the coming year, there will be a $7,500 maximum credit for new electric vehicles (EVs), with extra credits of up to $4,000 for used EVs.
But keep in mind that until 2027, eligibility for these credits depends on things like the car’s manufacturing location, as well as where you source battery components and minerals. These requirements are designed to boost the US economy and supply chains.
So while this makes EV tax credits more accessible, it’s only really on condition that you source an EV in the US.
Increased Retirement Contribution Limits
It’s never too late to start saving for retirement. And now, you can put away even more, because the IRS has increased the annual contribution limit for 401(k)s to $23,000 as part of the 2025 tax adjustments. And if you’re 50 and older, you can add an extra $7,500 as a catch-up contribution.
SIMPLE Plans and SEP IRA contribution limits have also increased. Now, they’re capped at $16,500 and $70,000, respectively.
This means that if you have an employer matching your retirement contributions in the coming year, you’ll get more bang for your buck. Also remember that contributions to 401(k) plans and traditional IRAs can lower your taxable income, while contributions to a Roth IRA mean tax-free withdrawals when you retire.
Adjustments to Charitable Giving Incentives
If you donate to charity, note that as part of the 2025 tax adjustments, Qualified Charitable Distributions (QCDs) from IRAs have increased to $108,000. One-time donation limits to Charitable Remainder Trusts or Gift Annuities have also increased.
But on the downside, the expiration of provisions from the TCJA at the end of 2025 could cause issues in the future. For example, the deduction limit for cash contributions temporarily increased to 60% of adjusted gross income (AGI) under the Act. However, this could go back to the previous limit of 50% by the end of 2025. Basically, this means that you may not be able to deduct higher donations in the future.
One way to work around this is to bunch your donations. By combining contributions from multiple years into a single tax year, you’ll be able to exceed the standard deduction threshold, and maximize the tax efficiency of your donations.
Gift Tax Exclusion Increase
Along with the numerous 2025 tax adjustments mentioned above, the annual gift tax exclusion has gone up to $19,000 for the next year. This means you can transfer wealth tax-free, which is a great help for estate planning. The lifetime estate and gift tax exemption has also gone up to $13.99 million per person, or $27.98 million for married couples filing jointly.
To really maximize these increases, make the most of the annual limits by transferring wealth to your kids, grandchildren, or other recipients. After all, assets transferred this way are removed from your taxable estate, shielding them from future appreciation and estate taxes.
Depreciation Changes for Real Estate Investors
Over the past few years, bonus depreciation has slowly been phased out by 20% a year. By 2027, it will be totally eliminated. This means that if you have real estate investments, you’ll need to adjust your tax strategy.
One option is to make the most of available real estate deductions. That’s where cost segregation studies come in. Basically, they allow you to speed up depreciation by reclassifying components of your property with shorter depreciation schedules. This allows you to make the most of deductions in the first few years that you own property, even with the phase-out of bonus depreciation.
But this means you need to have a strategic plan in place.
A tax expert can offer you professional advice so that you can unlock the full benefits of depreciation strategies.
Increased IRS Audits: What to Expect
One unfortunate change that has also been introduced by the IRS is the potential for more audits. This is especially true since the body has been making increased use of AI to ensure compliance.
The IRS is paying particular attention to areas in which it has previously seen the most people abusing tax codes, and trying to conduct fraud. However, this means that as long as your tax returns are in order and you don’t owe the IRS significant amounts of money, you should be unaffected.
Still, the taxman also uses algorithms to select audit cases, so there’s always a chance you’ll receive a dreaded audit notice, even though you’ve done nothing wrong. But if you’ve kept careful documentation and records, and made sure that your returns are error-free, you really don’t have to worry. If you’re in doubt, reach out to a tax pro.
For help with your taxes in 2025, or to create a tax strategy that accounts for the 2025 tax adjustments, schedule a free Discovery Call with our team today!
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