Inflation may have eased since its peak in 2022, but it continues to influence federal tax provisions. The IRS has announced inflation-adjusted tax changes for 2025, including updates to key deductions, tax brackets, and contribution limits. Here’s a breakdown of the most notable changes:
1. Standard Deduction Increases
A higher standard deduction means more of your income will be shielded from federal taxes in 2025. The updated amounts are:
Single filers: $15,000 (up from $14,600 in 2024)
Married couples filing jointly: $30,000 (up from $29,200)
Heads of household: $22,500 (up from $21,900)
This adjustment provides taxpayers with more opportunities to reduce their taxable income.
2. Top Tax Bracket Thresholds
The highest federal tax rate of 37% will apply to higher income thresholds in 2025:
Single filers and heads of household: Income above $626,350
Married couples filing jointly: Income above $751,600
In comparison, the 2024 thresholds are $609,350 and $731,200, respectively.
3. Retirement Plan Contributions
There is good news for retirement savers. Contribution limits have increased since last year.
401(k), 403(b), and most 457 plans: Maximum contribution increases to $23,500 (up from $23,000 in 2024).
Catch-up contributions for age 50+: Remains at $7,500, bringing the total to $31,000 for older participants.
Special catch-up contributions for ages 60–63: Beginning in 2025, eligible individuals can contribute an additional $11,250, for a total of $34,750.
IRA contribution limits will remain steady at $7,000, with a $1,000 catch-up contribution for those age 50 and older.
4. Flexible Spending Accounts (FSAs)
For those using FSAs to pay for medical expenses with pre-tax dollars, the annual contribution limit is increasing to $3,300 (up from $3,200 in 2024). Employers may also allow a carryover of unused funds, with the maximum carryover rising to $660 in 2025 (up from $640).
5. Tax-Free Gift Limits
The federal gift tax exclusion amount is rising, making it easier to give without tax implications. For 2025, you can gift up to $19,000 per recipient, up from $18,000 in 2024.
Plan Ahead
This year’s tax season will begin on Monday, January 27. Understanding these adjustments can help you maximize available tax breaks. Whether it’s increasing your retirement savings, making strategic gifts, or planning your deductions, knowing what’s ahead gives you the chance to take full advantage of these changes.
Stay proactive with your financial planning and consult your VAAS Tax Professional to optimize your strategy for the year ahead.