FINANCIAL PLANNING TIDBITS: 2025 CONTRIBUTION LIMITS AND STANDARD DEDUCTION ANNOUNCED

SUMMARY

The IRS adjusted the 2025 contribution limits for some retirement accounts, and next year will be the first implementation of a new provision for earners age 60 through 63.

MILD SHIFTS AND A NEW POLICY

With inflation measures indicating a less harrowing 2024, the IRS announced spottier contribution limit changes than in prior years. Only a few account types saw an increase in their contribution limit, while there were no inflation-related increases for 2025 catch-up contributions. However, starting next year, legislative changes will boost the catch-up contribution limits for those who are or will be age 60-63. Such employees are eligible to contribute an additional $3,750 in catch-up contributions to their 401(k)s and other similar retirement plans, bringing the total maximum employee contribution for this age group to $34,750. Standard catch-up contributions remain available to employees age 50 and older.

The deductibility phaseout range for IRA contributions (if you are covered by a workplace retirement plan) will increase to $79,000-$89,000 for individuals and $126,000-$146,000 for those married filing jointly. Meanwhile, the Roth IRA income phaseout range will increase to $150,000-$165,000 for individuals and $236,000-$246,000 for those married filing jointly.

As a reminder, in most cases, 2024 employee contributions to employer plans such as 401(k)s and 403(b)s must be made by December 31, 2024. You can continue to make 2024 contributions to traditional and Roth IRAs until Tax Day, April 15, 2025, and to SEP IRAs until you file your taxes (including any extensions). Recall as well that those in disaster-affected areas of the U.S. have until May 1, 2025, to file their 2024 taxes—in the past, this has included a commensurate extension for contributing to IRAs and HSAs.

TAX DEDUCTIONS

The standard deduction for individual filers for tax year 2025 is also increasing, from $14,600 (2024) to $15,000. For those who are married filing jointly, the deduction will increase from $29,200 (2024) to $30,000. Remember that these are deductions for filing your 2025 taxes in 2026.

OTHER CHANGES

The annual gift tax exclusion is increasing from $18,000 in 2024 to $19,000 in 2025. This means you can give up to $19,000 each to as many people as you wish without having to count the amount toward your lifetime gift tax exclusion ($13.99 million for 2025). Note that giving more than the annual gift tax exclusion amount does not mean you will owe taxes on any part of that amount. You will, however, be required to report the excess over the annual exclusion. Taxes are only owed on the amount over the lifetime exclusion of $13.99 million (2025).

The IRS has also released the marginal rates for 2025 taxes:

We have a progressive tax system, which means that your effective tax rate might be different than your marginal tax rate. You can fall into multiple tax brackets. For example, if your post-deduction taxable income is $30,000, you would pay 10% in taxes on the first $11,925 ($1,192.50), and then 12% on the remaining amount ($2,169). Your total pre-tax-credit tax liability in this case is $3,361.50, which is an effective tax rate of 11.205% even if you “fall” in the 12% marginal tax bracket.

How much you’re able to contribute to your retirement and where to put that money is a strategic and cash flow decision, and the Team at Day Hagan is here to help you. If you have questions about your contributions or any of the recent changes, please don’t hesitate to reach out.

Natalie G. Brown, CFP®
Director of Client Services & Financial Planning
Day Hagan Private Wealth

—Written 11.08.2024.

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