Potential Tax Changes in 2025: What You Need to Know

Several significant tax changes in 2025 could impact individuals, businesses, and tax professionals alike. From the expiration of key provisions in the Tax Cuts and Jobs Act (TCJA) to inflation adjustments and potential legislative developments, staying informed is crucial for proactive planning. Here’s an overview of what’s coming and how to prepare.

Expiration of Key TCJA Provisions

The TCJA, enacted in 2017, introduced sweeping changes to the U.S. tax code. However, many provisions were temporary and are set to expire at the end of 2025. Key changes include:

Individual Tax Rates
The current tax brackets and rates are scheduled to revert to pre-TCJA levels. This could potentially increase tax liabilities for many households. For example, the top individual rate would rise from 37% back to 39.6%.
Standard Deduction
The enhanced standard deduction – currently $13,850 for single filers and $27,700 for married couples filing jointly – will decrease significantly. Personal exemptions, which were eliminated under the TCJA, are set to return.
Child Tax Credit
The credit amount is expected to drop from $2,000 per child to $1,000. There will be stricter income thresholds, reducing its accessibility for middle-income families.
SALT Limitation: Currently the itemized deduction for state and local income tax is limited to an annual $10,000. That limit will expire after 2025. There has already been talk about raising it to $20,000 while others favor allowing it to expire.

Changes 1 through 3 on the above list could result in higher tax bills for many Americans unless Congress acts to extend or amend the provisions. Change number 4, on the other hand, would reduce taxes for higher-income taxpayers.

Tax Changes Regarding IRS Inflation Adjustments

Each year, the IRS adjusts various tax provisions to account for inflation, and 2025 will be no exception. Key updates include:

Tax Brackets
Income thresholds for each tax bracket will increase, offering some relief against inflation-driven income growth.
Standard Deduction
Set to rise slightly, with single filers expected to see a deduction of $15,000, and joint filers $30,000.
Earned Income Tax Credit (EITC)
Income limits for eligibility and maximum credit amounts will also increase. This will benefit low – moderate-income workers. The maximum EITC will increase from $7,830 in 2024 to $8,046 in 2025.

These adjustments aim to prevent “bracket creep,” where inflation pushes taxpayers into higher brackets. Which increases taxpayers liability, despite no real increase in purchasing power.

Retirement Contributions

Good news for savers! Contribution limits for certain retirement accounts, including 401(k)s and Self Employed Retirement (SEP) plans, are increasing in 2025, while IRA contribution limits remain unchanged.

401(k) Plans
The elective deferral limit increases from $23,000 in 2024 to $23,500 in 2025, enabling employees to save more for retirement on a tax-deferred basis. But the big news is the increase in the makeup contributions for taxpayers aged 60 through 63.
Catch-Up Contributions
For taxpayers aged 50 and older, catch-up contribution limits remain unchanged at $7,500 for 2024 and 2025. However, for 2025 those aged 60 through 63 the catch up contribution will be $11,250. Giving those aged 60 through 63 additional opportunities to bolster retirement savings.

These increases reflect the IRS’s effort to align savings opportunities with inflation, ensuring Americans can adequately prepare for their golden years.

Tax Changes in Legislation on the Horizon

With the upcoming presidential election and shifting priorities in Congress, there is growing debate over whether certain TCJA provisions, like the hot-button federal Child Tax Credit, should be extended or allowed to expire. Key topics under discussion include:

Extending Individual Tax Cuts
Some policymakers argue for making the current lower tax rates permanent to avoid a tax hike for millions of Americans.
Child Tax Credit Expansion
Proposals to maintain the current $2,000 credit, or even increase it further, are gaining traction as policymakers recognize its importance for families.

Additionally, the possibility of introducing new tax incentives for clean energy investments or small businesses could shape the legislative agenda in the coming year.

If you have questions about how these updates might impact your financial situation or would like personalized guidance, contact this office today for expert advice to help you prepare for the year ahead.