Key Tax Changes for 2025: What You Need to Know

As tax professionals, we understand that staying informed about tax law changes is essential for effective financial planning. Each year brings adjustments to tax brackets, deduction limits, retirement contribution thresholds, and sometimes more significant policy shifts that can substantially impact your tax liability.

The tax landscape for 2025 includes several noteworthy changes that individuals and businesses should be aware of when planning for the upcoming tax year. This article summarizes the most important updates and provides guidance on how these changes might affect your personal and business tax situations.

Individual Income Tax Changes

Tax Brackets and Rates

For the 2025 tax year, the IRS has adjusted income tax brackets for inflation. While the tax rates remain the same (10%, 12%, 22%, 24%, 32%, 35%, and 37%), the income thresholds for each bracket have increased.

Here are the updated federal income tax brackets for 2025:

Single Filers:

• 10% tax rate: Income up to $11,600
• 12% tax rate: Income over $11,600 to $47,150
• 22% tax rate: Income over $47,150 to $100,525
• 24% tax rate: Income over $100,525 to $191,950
• 32% tax rate: Income over $191,950 to $243,725
• 35% tax rate: Income over $243,725 to $609,350
• 37% tax rate: Income over $609,350

Married Filing Jointly:

• 10% tax rate: Income up to $23,200
• 12% tax rate: Income over $23,200 to $94,300
• 22% tax rate: Income over $94,300 to $201,050
• 24% tax rate: Income over $201,050 to $383,900
• 32% tax rate: Income over $383,900 to $487,450
• 35% tax rate: Income over $487,450 to $731,200
• 37% tax rate: Income over $731,200

For most taxpayers, these inflation adjustments mean paying slightly less tax on the same real income compared to previous years.

Standard Deduction

The standard deduction has increased for 2025 due to inflation adjustments:

• Single filers and Married filing separately: $14,600 (up from $13,850 in 2024)
• Married filing jointly: $29,200 (up from $27,700 in 2024)
• Head of household: $21,900 (up from $20,800 in 2024)

With these higher standard deduction amounts, fewer taxpayers will benefit from itemizing deductions unless they have significant mortgage interest, charitable contributions, or other qualifying expenses.

Retirement Contribution Limits

Contribution limits for retirement accounts have been adjusted for 2025:

• 401(k), 403(b), and most 457 plans: $23,000 (up from $22,500 in 2024)
• Catch-up contributions for those 50 and older: $7,500 (unchanged from 2024)
• Traditional and Roth IRAs: $7,000 (up from $6,500 in 2024)
• IRA catch-up contributions for those 50 and older: $1,000 (unchanged from 2024)
• SIMPLE IRAs: $16,000 (up from $15,500 in 2024)
• SEP IRAs: Up to $69,000 or 25% of compensation, whichever is less (up from $66,000 in 2024)

These increased limits provide opportunities to save more for retirement on a tax-advantaged basis.

Health Savings Accounts (HSAs)

HSA contribution limits have increased for 2025:

• Individual coverage: $4,150 (up from $4,050 in 2024)
• Family coverage: $8,300 (up from $8,150 in 2024)
• Catch-up contributions for those 55 and older: $1,000 (unchanged)

To qualify for an HSA, your health insurance plan must have a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage.

Capital Gains Tax Thresholds

Long-term capital gains tax rates remain unchanged at 0%, 15%, and 20%, but the income thresholds have been adjusted for inflation:

• 0% rate: Income up to $47,025 (single) or $94,050 (married filing jointly)
• 15% rate: Income between $47,025 and $518,900 (single) or between $94,050 and $583,750 (married filing jointly)
• 20% rate: Income above $518,900 (single) or $583,750 (married filing jointly)

Additionally, the Net Investment Income Tax (NIIT) of 3.8% continues to apply to investment income for taxpayers with modified adjusted gross income exceeding $200,000 (single) or $250,000 (married filing jointly).

Business Tax Changes

Qualified Business Income Deduction (Section 199A)

The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their qualified business income from a pass-through entity. For 2025, the threshold amounts for the QBI deduction phase-out have been adjusted for inflation:

• $191,950 for single filers (up from $182,100 in 2024)
• $383,900 for married filing jointly (up from $364,200 in 2024)

Business owners with income below these thresholds generally qualify for the full deduction, while those with higher incomes may face limitations based on W-2 wages paid and qualified property.

Section 179 Expensing

The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment and software in the year it's placed in service. For 2025, the limits are:

• Maximum deduction: $1,160,000 (up from $1,130,000 in 2024)
• Phase-out threshold: $2,950,000 (up from $2,890,000 in 2024)

This provision provides significant tax benefits for businesses investing in equipment, furniture, vehicles, and certain improvements to business property.

Bonus Depreciation

The bonus depreciation percentage for qualified business assets continues its scheduled phase-down in 2025:

• 2025: 20% bonus depreciation (down from 60% in 2024)
• 2026 and beyond: Bonus depreciation is scheduled to be eliminated unless extended by Congress

With bonus depreciation decreasing, businesses should consider accelerating planned equipment purchases to maximize available deductions.

Business Mileage Rate

The standard mileage rate for business use of a vehicle has increased to 67.3 cents per mile for 2025 (up from 65.5 cents in 2024), reflecting higher vehicle costs and fuel prices.

Other Notable Tax Changes

Estate and Gift Tax Exemption

The federal estate and gift tax exemption has increased to $13.61 million per individual for 2025 (up from $13.01 million in 2024). This means an individual can transfer up to $13.61 million in assets during life or at death without incurring federal estate or gift taxes. Married couples can effectively transfer twice this amount.

It's important to note that this exemption amount is scheduled to decrease significantly after 2025 unless Congress takes action to extend the current levels.

Alternative Minimum Tax (AMT)

The AMT exemption amounts have been adjusted for inflation:

• Single filers: $85,700 (up from $81,300 in 2024)
• Married filing jointly: $133,300 (up from $126,500 in 2024)

The exemption phase-out thresholds have also increased to $609,350 for single filers and $1,218,700 for married couples filing jointly.

Earned Income Tax Credit (EITC)

The maximum EITC amount for qualifying taxpayers with three or more qualifying children has increased to $7,830 for 2025 (up from $7,430 in 2024). Other EITC amounts and income limits have also been adjusted for inflation.

Child Tax Credit

For 2025, the Child Tax Credit remains at $2,000 per qualifying child under age 17, with up to $1,600 being refundable (subject to income limitations). The credit begins to phase out for single filers with modified adjusted gross income above $200,000 and married couples filing jointly with income above $400,000.

Potential Future Tax Law Changes

Several provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 are scheduled to expire after 2025, which could lead to significant tax changes in 2026 and beyond if Congress doesn't act to extend them. Key provisions set to expire include:

• Individual income tax rates and brackets
• Increased standard deduction amounts
• Limitations on state and local tax deductions
• Qualified Business Income deduction (Section 199A)
• Increased estate and gift tax exemptions

Given the potential for substantial tax law changes in the coming years, strategic multi-year tax planning is increasingly important.

Impact Analysis and Planning Considerations

For Individuals

• Review withholding: Ensure your tax withholding aligns with the updated tax brackets and your expected income.
• Maximize retirement contributions: Take advantage of increased contribution limits to reduce taxable income and build retirement savings.
• Consider Roth conversions: With potential tax rate increases after 2025, converting traditional retirement funds to Roth accounts at current rates might be beneficial for some taxpayers.
• Accelerate charitable giving: If you expect to be in a lower tax bracket in 2025 than in future years, consider accelerating charitable contributions.
• Review estate plans: With the estate tax exemption scheduled to decrease after 2025, review your estate plan to ensure it remains optimized.

For Businesses

• Evaluate equipment purchases: With bonus depreciation decreasing, consider whether to accelerate planned equipment purchases into 2025.
• Review entity structure: Assess whether your current business entity type remains optimal given the evolving tax landscape.
• Maximize retirement plan options: Consider establishing or enhancing retirement plans to take advantage of increased contribution limits.
• Plan for potential QBI changes: Develop contingency plans for the potential expiration of the Section 199A deduction after 2025.

Conclusion: Proactive Planning Is Key

Tax law changes, while sometimes complex, also create planning opportunities. Understanding these changes and their potential impact on your specific situation is essential for minimizing tax liability and achieving your financial goals.

At AM Professional Services, we specialize in helping clients navigate the evolving tax landscape through proactive, personalized tax planning. Our team stays current with tax law changes and can help you implement strategies that align with your unique circumstances.

Remember that tax planning should be an ongoing process, not just a year-end exercise. Regular consultations with a tax professional ensure that your tax strategy remains optimized as laws change and your personal and business situations evolve.