IRS adjustments, 401(k) changes, potential TCJA extensions, and more.
With the Republican win in the U.S. presidential election, the tax and accounting profession is bracing for the potential tax law changes that now lie ahead as President-elect Donald Trump returns to the White House. Meanwhile, the IRS has outlined several of its planned adjustments for 2025.
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On the campaign trail, Trump floated a wide range of tax policy ideas that could have a major impact on individuals, businesses, and estates. Now that he has secured a second term in office, the direction of the tax landscape begins to take shape.
Helping clients navigate upcoming changes in tax law, and how it may impact their tax liabilities, will prove especially important for the coming year as businesses and individuals will no doubt be seeking clarity and strategic guidance.
“From my perspective, the tax landscape is very uncertain. I think it is complicated. I think people are really worried about what kind of legislation we are going to see, primarily in response to the sunset of the Tax Cuts and Jobs Act…This is definitely a period of uncertainty for taxpayers and also tax professionals,” said Shaun Hunley, Thomson Reuters Executive Editor, in a recent Thomson Reuters webcast “Strategic tax planning in a changing political landscape.”
While many questions remain, now is the time to begin exploring some of the potential tax law changes and strategies for how tax and accounting professionals can stay up to date on changes as they unfold. Let’s first take a look at some of the key IRS adjustments for 2025.
IRS adjustments for 2025
Each year, the IRS adjusts dozens of tax provisions for inflation. As explained in a recent blog by Alex Durante, an Economist at the Tax Foundation, this is done to avoid what is known as “bracket creep.”
“Bracket creep occurs when inflation, rather than real increases in income, pushes people into higher income tax brackets or reduces the value they receive from credits and deductions,” Durante wrote.
“The IRS previously used the Consumer Price Index (CPI) as a measure of inflation prior to 2018,” Durante continued. “However, with the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.”
In late October, the IRS announced the annual inflation adjustments for tax year 2025 and detailed information on adjustments and changes to more than 60 tax provisions that will impact taxpayers when they file their returns in 2026.
Some of the items for tax year 2025 that are likely to be of greatest interest to taxpayers include:
Rise in standard deductions
For married couples filing jointly, the standard deduction increases to $30,000, up $800 from tax year 2024. For heads of households, it is $22,500 for tax year 2025, up $600 from tax year 2024. For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction increases to $15,000 for 2025, up $400 from 2024.
Alternative minimum tax (AMT) exemption
For tax year 2025, the exemption amount for unmarried individuals increases to $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350, the IRS announced. For married couples filing jointly, the exemption amount rises to $137,000 and begins to phase out at $1,252,700.
Earned income tax credit
For qualifying taxpayers who have three or more qualifying children, the maximum Earned Income Tax Credit amount is $8,046 for tax year 2025. This is up from $7,830 for tax year 2024.
Estate tax credits
The federal estate-tax exclusion amount increases to $13.99 million from $13.61 million in 2024.
What’s not changing?
- The personal exemptions remain at $0 for tax year 2025. The elimination of the personal exemption was part of the TCJA.
- The maximum child tax credit is $2,000 per qualifying child, with a refundable amount of $1,700.
401(k) and Roth changes
On the heels of releasing the annual inflation adjustments for 2025, the IRS also announced several changes to retirement-related items, including 401(k) limit increases and higher income thresholds for Roth IRA contributions.
For 2025, the amount individuals can contribute to their 401(k) plans will increase to $23,500, up from $23,000 for 2024. This change applies to those who participate in 401(k) plans, as well as 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan.
The IRS also revealed that, starting in 2025, the 401(k) catch-up contribution limit will remain at $7,500 for participants aged 50 and older. However, under a change made in SECURE 2.0, a higher catch-up contribution limit applies to investors aged 60 to 63. This higher catch-up contribution limit is $11,250 instead of $7,500.
In addition, the IRS announced higher income thresholds for Roth IRA contributions.
For Roth IRA contributions in 2025, the income phase-out range for taxpayers increases to between $150,000 and $165,000 for singles and heads of household, up from between $146,000 and $161,000. For married couples filing jointly, the income phase-out range rises to between $236,000 and $246,000, up from between $230,000 and $240,000.
The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA remains between $0 and $10,000 (it is not subject to an annual cost-of-living adjustment).
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Future of the TCJA
At the end of 2025, a significant portion of the TCJA is set to expire. While uncertainty remains, Republicans generally favor a broad extension of the sunsetting provisions. Let’s take a closer look at some of Trump’s policy proposals.
- Trump is looking to extend the Qualified Business Income (QBI) deduction. The 20% deduction for certain QBI is currently set to expire at the end of 2025.
- Trump has proposed to reinstate and make permanent 100% bonus depreciation. When enacted by TCJA, bonus depreciation enabled businesses to immediately write off 100% of the cost of eligible property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Prior to TCJA, it was 50%. The bonus percentage is now decreasing 20 points each year (40% for 2025), and will fully phase out beginning Jan. 1, 2027.
- Individual income tax rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%) will expire after 2025 and revert to pre-TCJA rates. Trump has proposed to extend or make permanent these rates and replace individual income tax with increases in tariffs.
- Trump has proposed to reduce the corporate income tax rate from 21% to 20%; 15% for companies that manufacture in the U.S.
- Unless Congress acts, the lifetime gift and estate tax exemption will take a drastic drop in 2026, reverting to near-2017 levels of roughly $7 million. Unless changed with legislation, the 40% rate is permanent. Trump has proposed to extend the TCJA exemption amount increase and maintain the 40% rate.
As noted earlier, much uncertainty remains as any tax proposals would have to pass through Congress to be enacted. However, as Trump returns to the White House in January, with a Republican majority in both the Senate and the House, there is a better chance that at least some of these proposed policies will become law. Businesses and individuals will need guidance in determining what these looming changes may mean for their tax liabilities.
“I feel like this uncertainty with the potential expiration of these provisions is going to be kind of the biggest thing that you as practitioners are going to be dealing with this year and next year and kind of preparing for that,” said Hunley. “The real question is how do you prepare for this? I think modeling is really important. Modeling the different scenarios and proactively telling each client, ‘This is what could happen and we just need to be prepared for whatever outcome.’”
Elimination of taxes on Social Security benefits
While campaigning, Trump promised to eliminate taxes on Social Security benefits. It’s an eyebrow-raising idea that many experts believe would be difficult to garner the support needed to pass. Such a change would require at least 60 Senate votes.
“It’s hard for me to imagine that Democrats would be willing to provide votes to get over that 60-vote threshold and weaken Social Security solvency,” said Charles Blahous, senior research strategist at the Mercatus Center at George Mason University, in a CNBC article.
The notion of nixing taxes on Social Security benefits has sparked concern that such a move could be detrimental to Social Security’s finances.
A report by the Committee for a Responsible Federal Budget estimates that Trump’s proposal would increase Social Security’s 10-year cash shortfall by $2.3 trillion through fiscal year 2035 and would advance the insolvency of Social Security by three years, from fiscal year 2034 to fiscal year 2031.
However, the Trump campaign reportedly disagreed with the findings, calling the Committee for a Responsible Federal Budget “consistently wrong,” CNBC reported.
So what does this mean for today’s tax planning? Financial advisors have reportedly said it is too soon to jump to conclusions and too early to factor in an elimination of taxes on Social Security benefits when doing financial planning.
Stay aware of upcoming tax law changes
With so many potential tax law changes on the horizon, it will be especially important for accountants to keep pace with the changes as they unfold.
Clients will be seeking clarity and guidance to ensure compliance and minimize their tax liabilities. With the right tools and resources in place, accountants can quickly and confidently find the answers they need for strategic tax planning.
“It is an opportunity for practitioners to add value by connecting what is going on in the macro politics, what you might read in the Wall Street Journal, to your clients’ particular issues and really identify and triage for them what are the key points, what are the key possibilities. Then, over 2025, given what we know… you can present options to clients. There might be choices about when to incur income, when to make gifts, when to do certain transactions, whether it is in 2025 or 2026,” said Daniel Winnick, Principal, Washington National Tax, International Tax, KPMG, in the Thomson Reuters webcast.
Continued Winnick, “A well-educated client is in a better position to decide the timing of transactions based on, ultimately, their own judgement about their business and about the future. We can’t forecast the future but, as practitioners, we can provide our view of what the universe of possibilities are so that our clients can be better informed.”
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