Last week the Internal Revenue Service (IRS) announced their annual inflation adjustments for tax year 2025. Income thresholds are set to rise by about 2.8% from 2024’s brackets. This is the smallest increase in several years as the rate of inflation has slowed down. Here are the new figures:
Other important updates:
- Standard deduction – increases to $15,000 for Single Filers, $30,000 for Married Filing Jointly, and $22,500 for Head of Households
- Estate Tax Exemption – increases to $13,990,000 per person ($27,980,000 for a married couple)
- Gift Tax Annual Exemption – increases to $19,000
Source: IRS.gov
It should also be noted that 2025 is the last year of the current tax laws put into place in 2017 in the Tax Cuts and Jobs Act (TCJA). If Congress doesn’t pass any new legislation or extensions for these provisions, the tax code is set to revert to pre-2017 laws, with inflation-adjusted rates. A few major changes would include:
- Estate Tax Exemption would drop to around $7MM per person ($14MM for a married couple)
- Standard Deduction would likely drop by one-half, but the personal exemptions return
- Previous, higher tax rates would revert back: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
- This is compared to current rates of: 10%, 12%, 22%, 24%, 32%, 35%, and 37%
- The State and Local Tax (SALT) deduction cap of $10,000 would be removed
Sources: Brookings.edu, Forbes
It will be hard to predict what may happen to tax laws until after the election, and we see how much political will there is to act on any changes. However, Former President Donald Trump favors extending all of the expiring provisions. Vice President Kamala Harris hasn’t been specific on her plans but says she opposes tax increases on people making less than $400,000 a year, hinting that some provisions may stay, while some may change.
Higher Catch-Up Contributions for Ages 60 to 63 coming in 2025 – As part of the SECURE Act 2.0 bill passed in 2022, individuals approaching retirement will be permitted to make higher catch-up contributions to their 401(k), 403(b), and governmental 457(b) plans starting next year. Participants attaining ages 60, 61, 62, or 63 before the end of the taxable year will have a maximum catch-up limit of the greater of $10,000 or 150% of the regular catch-up limit. Contribution limits for 2025 have not been announced yet, but the catch-up limit for ages 50+ is projected to be around $7,500, meaning individuals 60-63 would have a catch-up limit of $11,250. Established employer-sponsored plans are not required to offer these additional provisions, but since most plan providers get paid based on the amount of assets in the plan, many plans will likely be amended to allow them. It will be important to check with your plan to determine your eligibility.
An additional provision set to start in 2025, would have required workers who earned $145,000 or more to make any catch-up contributions to a Roth. This has been delayed until 2026.
Financial Planning/Investment Strategy Corner:
Year-End Planning – Giving and Gifting
The end of the year and holiday season provide a natural time for many to focus on giving back. Doing so tax-efficiently can provide significant benefits to both you and the organizations or individuals you are giving to. Here are some great ways to structure your giving:
Donor-Advised Funds – A donor-advised fund allows individuals and families to take an immediate tax deduction for their donations, while the donations can grow tax-free in the fund and be distributed to charitable organizations at the discretion of the donor. If you own stock or a security that has a significant unrealized gain or a large individual stock position(s), both can be donated to a donor-advised fund. You, the owner of the stock, are not taxed on the gain and get a tax deduction on the full amount (up to a percentage of your adjusted gross income). The charitable organization is also not taxed as a 501(c)(3) organization. A win-win! Cash donations are certainly allowed as well. To read about all of the benefits and strategies of a donor-advised fund, check out our article: RSWA – Charitable Giving Made Easy with Donor-Advised Funds
Qualified Charitable Distributions (QCDs) – Once the owner of an IRA reaches age 73, they are required to start taking minimum distributions (RMDs) from their pre-tax retirement accounts. For many, this is welcome extra income, but for others, they receive more money from their accounts than they need to live on, and, in turn, pay more taxes than necessary. For individuals in the latter half, a QCD could benefit them greatly. A QCD allows individuals ages 70.5 or older to make charitable donations straight from their pre-tax IRAs. Any amount donated counts toward your annual RMD requirement and is not taxed to you or the charitable organization. Learn more about QCDs here: RSWA - Using an IRA QCD: Consider Giving Your IRA RMD to Charity
Gifting to Non-Charitable Organizations – Giving to charitable organizations is obviously great, but sometimes you may want to give to those around you (family, friends, etc.). The annual gift tax exclusion for 2024 is $18,000, meaning that an individual can gift up to $18,000 to as many other individuals as they want without paying taxes on the gifts. Spouses can combine their limits to increase their limit to $36,000 per recipient. The gifts can be made in cash or other type of assets (stocks, bonds, real estate, etc.). Since the person you are giving to will have to pay tax on any gains realized when selling the asset, the type of asset and the unrealized gain should be considered. Some gifts are not subject to gift tax, including school tuition and education payments, medical expenses, and political contributions, as long as these are sent directly to these institutions, not the donee.
Please talk with your tax advisor before making any gifts or donations.
Quick Hits:
- I was asked to be a guest on Frankly Speaking, a podcast about people and stories from the Seacoast NH area, to share my experiences training for and running marathons. If you don’t hear me talk enough in meetings already and want to hear more, here you go: Spotify Apple Podcasts
- The rise of high-end continuing care retirement communities (CCRCs) – a great way to spend your later years, but with a hefty price tag: WSJ - Wealthier Americans Are Paying Millions to Age in Luxury Campuses
- I have heard many comments referring to moving to a new country depending on election results (some joking, some not), here are 20 to consider: Travel & Leisure - 20 Best Countries for Americans Who Want to Live Abroad
- Budget airline, Breeze Airways, has started services from Portsmouth International Airport at Pease and Bangor International Airport with trips to popular Florida destinations. Here is where you can fly: NH Business Review Mainebiz
- Schwab has simplified their client statement experience, making their statements shorter and easier to read! You should expect to see the changes starting with your October statement.
Best of the 207 Voting Is Open! RSWA has been awarded as one of the best financial planning and wealth management firms in Maine by Best of 207 for the past two years. We were very honored for those of you who had the confidence and took the time to vote for us. RSWA was nominated for both the best financial planning and wealth management firm categories again in 2024. Voting has now started and runs through November 13th. Anyone can vote for a firm and vote once a day. We would be very honored by anyone willing to vote for us again this year. Thank you! Best of 207 – RSWA
Go Vote! If you haven’t heard yet, there is another important vote happening next week. Here are a few resources to help you find your voting location, voter registration, or register to vote. Now get out there on Tuesday!
- Where to vote Vote.org – Polling Place Locator
- Check your voter registration: Vote.org – Am I Registered To Vote?
- Register to Vote: Vote.org – Register to Vote
Also, stay strong. We have less than a week of political ads left.
Quote: “Elections belong to the people. It's their decision. If they decide to turn their back on the fire and burn their behinds, then they will just have to sit on their blisters.” – Abraham Lincoln
Thank you for reading RSWA Financial Advisor Insights! We welcome feedback, and please forward this to a friend! Be well, take care, and stay safe!
