With the new year comes new tax changes that should be considered when preparing a financial plan and budget for 2025, as well as 2025 tax returns (to be filed in tax season 2026). Most of these changes are the result of the IRS’ annual inflation adjustment for tax year 2025.

The tax items for tax year 2025 of greatest interest to many taxpayers include the following:

Standard Deduction: The standard deduction will increase in 2025 to $15,000 for single taxpayers and married couples filing separately, and to $30,000 for married couples who file a joint return. For heads of households, the standard deduction will be $22,500 in tax year 2025.

Capital Gains Taxes: The threshold for capital gains taxes will also increase in 2025. While the long-term capital gains tax rate will stay the same as in 2024, the income thresholds have been modified with a 2.7% increase for all tax brackets. This means, for example, that a married couple who files a joint return and is subject to the 20% rate threshold will realize an additional $16,300 of income that can be taxed at the lower 15% rate compared to 2024. Capital gains are the profit from the sale of assets held for investment purposes, such as stocks, mutual funds, or real estate. You have a capital gain if you sell the asset for more than your adjusted tax basis.

Alternative Minimum Tax (AMT): The AMT is a separate tax “system” that requires taxpayers in high income tax brackets to calculate their tax liability twice – ordinary income tax rules calculation and AMT calculation – and pay whichever amount is highest. AMT has fewer preferences and different exemptions and rates than the ordinary system and it is designed to make sure taxpayers pay a “minimum” amount of tax. The AMT exemption for single taxpayers increases in 2025 to $88,100 and to $68,650 for married individuals filing separately. The amount is $137,000 for married couples filing a joint return. The exemptions phase out at higher incomes levels; $626,350 for single taxpayers and $1,252,700 for married couples filing jointly. It is important to note that current AMT rules are set to expire at the end of 2025, when the AMT system is set to revert to the pre-2018 rules; this will affect close to 8 million filers.

Retirement Catch-Up Contribution: The IRS’ cost-of-living adjustments for 2025 impact catch-up contributions as well. These rules allow employees aged 50 and older to make additional deposits – more than the limit for younger folks – into their tax-advantaged retirement savings accounts. In 2025, employed individuals can contribute $23,500 to a 401(k) account, up from $23,000 in 2024. If you are 50 or older, you can contribute an additional $7,500 in catch-up contributions. If you are between the ages of 60 and 63, you can contribute an additional $11,250 in catch-up contributions.

Business Related Expenses: Increases in deductions and allowances for business related expenses also take effect on January 1, 2025. The monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking rises to $325, increasing from $315 in 2024.

Foreign Earned Income: The foreign earned income exclusion will increase in 2025 from $126,500 to $130,000. The exclusion applies to income earned and taxed in a foreign country, allowing those earners to exclude this income from US taxes.

Adoption Credit: Families who adopt a child will also benefit from an increase in the maximum tax credit – from $16,810 in 2024 to $17,280 in 2025. The credit is also allowed for qualified adoption expenses for a child with special needs.

Gift Exclusion: The annual exclusion for gifts increases to $19,000 for calendar year 2025, up from $18,000 for calendar year 2024.

Estate Tax Exemption: The unified estate and gift tax exclusion for estates of decedents who die in 2025 will be $13,990,000, up from $13,610,000 in 2024. However, it is important to note that this $13.9 million exemption is scheduled to expire on December 31, 2025, and will be significantly reduced in 2026 – by almost half – if Congress does not take action to pass new legislation.

Do you have questions about any 2025 tax change or any other provisions you think may impact your tax situation? The tax professionals at Dembo Jones can help you by making the best use of all available tax deductions, credits, and exemptions. Contact us today!