|
IRS Announces 2025 Inflation Adjustments; Social Security Benefits Up 2.5% for 2025
(Parker Tax Publishing October 2024)
The IRS announced the tax year 2025 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. In addition, the Social Security Administration announced that benefits will increase by 2.5 percent in 2025 and that the amount of earnings subject to social security tax will be $176,100, up from $168,600 in 2024. Rev. Proc. 2024-40; 2025 Social Security Fact Sheet.
On October 22, the IRS announced the 2025 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules, the standard deduction, and other tax-related items. The 2025 adjustments generally apply to tax returns filed in 2026. If amendments to the Code are enacted for 2025 after October 22, 2024, the IRS advises taxpayers to consult additional guidance to determine whether such adjustments remain applicable for 2025.
Observation: The 2025 adjustments for several key items such as the standard deduction and the tax brackets represent an increase of approximately 2.7 percent over the 2024 amounts.
In addition, on October 10, the Social Security Administration (SSA) issued a press release announcing that, in January 2025, a 2.5 percent cost-of-living adjustment (COLA) will take effect with respect to social security and supplemental security income benefits. The SSA also announced that, for 2025, the maximum amount of an individual's earnings subject to social security tax is $176,100.
Below is a summary of (1) the key inflation adjusted numbers for 2025 from Rev. Proc. 2024-40 and (2) the 2025 COLA information from the Social Security 2025 Fact Sheet.
Taxable Income Subject to the Maximum Rates
For tax year 2025, the top tax rate is 37 percent for single taxpayers with incomes greater than $626,350 ($626,350 for heads of households, $751,600 for married couples filing jointly). The tax rates for income levels less than those are:
(1) 35 percent for incomes over $250,525 (single and married filing separately), $250,500 (head of household), and $501,050 (married couples filing jointly);
(2) 32 percent for incomes over $197,300 (single, head of household, and married filing separately) and $394,600 (married couples filing jointly);
(3) 24 percent for incomes over $103,350 (single, head of household, and married filing separately), and $206,700 (married couples filing jointly);
(4) 22 percent for incomes over $48,475 (single and married filing separately), $64,850 (head of household), and $96,950 (married couples filing jointly);
(5) 12 percent for incomes over $11,925 (single and married filing separately), $17,000 (head of household), and $23,850 (married couples filing jointly);
(6) the lowest rate is 10 percent for incomes of $11,925 or less (single and married filing separately), $17,000 or less (head of household), and $23,850 or less (married couples filing jointly).
The maximum estate and trust tax rate is 37 percent on income over $15,650.
Maximum Capital Gains Rate
For tax years beginning in 2025, the maximum zero capital gain tax rate amount is $96,700 in the case of a joint return or surviving spouse, $64,750 in the case of an individual who is a head of household, $48,350 in the case of any other individual (other than an estate or trust), and $3,250 in the case of an estate or trust. The maximum 15-percent capital gain tax rate amount is $600,050 in the case of a joint return or surviving spouse, $300,000 in the case of a married individual filing a separate return, $566,700 in the case of an individual who is the head of a household, $533,400 in the case of any other individual (other than an estate or trust), and $15,450 in the case of an estate or trust.
Unearned Income of Minor Children
For 2025, the amount in Code Sec. 1(g)(4)(A)(ii)(I), which is used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $1,350. This $1,350 amount is the same as the amount provided in Code Sec. 63(c)(5)(A), as adjusted for inflation. The same $1,350 amount is used for purposes of Code Sec. 1(g)(7) in determining whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax". For example, one of the requirements for the parental election is that a child's gross income is more than the amount referenced in Code Sec. 1(g)(4)(A)(ii)(I) but less than 10 times that amount. Thus, a child's gross income for 2025 must be more than $1,350 but less than $13,500 for a parent to make the election.
Standard Deduction Amounts
The standard deduction for married filing jointly is $30,000 for 2025. For single taxpayers and married individuals filing separately, the standard deduction is $15,000 for 2025, and for heads of households, the standard deduction is $22,500 for 2025.
The standard deduction amount under for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,350, or (2) the sum of $450 and the individual's earned income.
For 2025, the additional standard deduction amount for the aged (i.e., age 65 or older) or the blind is $1,600. That additional standard deduction amount is increased to $2,000 if the individual is also unmarried and not a surviving spouse.
Itemized Deduction Limitation
As with 2024, there is no overall limitation on itemized deductions. The limitation on itemized deductions was eliminated by the Tax Cuts and Jobs Act of 2017 (TCJA) through 2025.
Personal Exemptions
As with 2024, no personal exemptions are allowed for 2025. Personal exemptions were eliminated by the TCJA through 2025.
Gross Income Limitation for a Qualifying Relative
For tax years beginning in 2025, the exemption amount referenced in Code Sec. 152(d)(1)(B) is $5,200.
Alternative Minimum Tax
The alternative minimum tax (AMT) exemption amount under Code Sec. 55(d)(1) for 2025 for unmarried individuals other than surviving spouses, married individuals filing joint returns and surviving spouses, and married individuals filing separate returns is $88,100, $137,000, and $68,500, respectively. The exemption for estates and trusts is $30,700. Under Code Sec. 55(b)(1), the excess taxable income above which the 28 percent AMT tax rate applies is $119,550 for married filing separately and $239,100 for all other taxpayers.
The AMT exemption begins to phase out at $626,350 for unmarried individuals other than surviving spouses and married individuals filing separate returns, $1,252,700 for married individuals filing joint returns and surviving spouses, and $102,500 for estates and trusts.
Earned Income Credit
The 2025 maximum earned income credit amount is $8,046 for taxpayers filing jointly who have three or more qualifying children, up from a total of $7,830 for 2024. The maximum credit for a taxpayer with no qualifying children is $649, up from $632 for 2024. Rev. Proc. 2024-40 has a table providing maximum credit amounts for other categories, income thresholds, and phase-outs.
Qualified Business Income
The qualified business income deduction under Code Sec. 199A is subject to certain limitations for taxpayers whose income exceeds a threshold amount. For tax years beginning in 2025, the threshold amount under Code Sec. 199A(e)(2) is $394,600 for married filing joint returns, $197,300 for married filing separate returns, and $197,300 for all other returns.
Limitation on Use of Cash Method of Accounting
For tax years beginning in 2025, a corporation or partnership meets the gross receipts test of Code Sec. 448(c) for any tax year if the average annual gross receipts of such entity for the three-tax-year period ending with the tax year which precedes such tax year does not exceed $31 million.
Threshold for Excess Business Loss
For tax years beginning in 2025, in determining a taxpayer's excess business loss, the amount under Code Sec. 461(l)(3)(A)(ii)(II) is $313,000 ($626,000 for joint returns).
Estate Tax Exclusion
Estates of decedents who die during 2025 have a basic exclusion amount of $13,990,000.
Valuation of Qualified Real Property in Decedent's Gross Estate
For an estate of a decedent dying in calendar year 2025, if the executor elects to use the special use valuation method under Code Sec. 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use Code Sec. 2032A for purposes of the estate tax cannot exceed $1,420,000.
Interest on a Certain Portion of the Estate Tax Payable in Installments
For an estate of a decedent dying in calendar year 2025, the dollar amount used to determine the "2-percent portion" (for purposes of calculating interest under Code Sec. 6601(j)) of the estate tax extended as provided in Code Sec. 6166 is $1,900,000.
Penalty for Failure to File Tax Return
In the case of any return required to be filed in 2026, the amount of the addition to tax under Code Sec. 6651(a) for failure to file a tax return within 60 days of the due date of such return (determined with regard to any extensions of time for filing) must not be less than the lesser of $525 or 100 percent of the amount required to be shown as tax on such returns.
Penalty for Failure to File a Partnership Return
In the case of any partnership return required to be filed in 2026, the dollar amount used to determine the amount of the penalty under Code Sec. 6698(b)(1) is $255.
Penalty for Failure to File an S Corporation
In the case of any S corporation return required to be filed in 2026, the dollar amount used to determine the amount of the penalty under Code Sec. 6699(b)(1) is $255.
Limit on Employee Contributions to FSAs
The annual dollar limit for 2025 on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) is $3,300. If the cafeteria plan permits the carryover of unused amounts, the maximum carryover amount is $660.
Small Employer Health Insurance Credit
Under the small business health care tax credit, the maximum credit for 2025 is phased out based on the employer's number of full-time equivalent employees in excess of 10 and the employer's average annual wages in excess of $33,300.
Gift Tax Exclusions
The 2025 annual exclusion for gifts is $19,000. For 2025, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $190,000.
AMT Exemption for a Child Subject to the Kiddie Tax
For 2025, for a child to whom the "kiddie tax" applies, the exemption amount under Code Sec. 55(d) and Code Sec. 59(j) for purposes of the alternative minimum tax may not exceed the sum of (1) the child's earned income for the tax year, plus (2) $9,550.
Election to Expense Certain Depreciable Assets
For 2025, the aggregate cost of any Code Sec. 179 property that a taxpayer elects to treat as an expense cannot exceed $1,250,000. The $1,250,000 limitation is reduced (but not below zero) by the amount the cost of Code Sec. 179 property placed in service during the 2025 tax year exceeds $3,130,000.
Energy Efficient Commercial Building Deduction
For tax years beginning in 2025, the applicable dollar value used to determine the maximum allowance of the deduction under Code Sec. 179D(b) is $0.58 increased (but not above $1.16) by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent. In addition, for tax years beginning in 2025, the applicable dollar value used to determine the increased deduction amount for certain property under Code Sec. 179D(b)(3)(A) is $2.90 increased (but not above $5.81) by $0.12 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent.
Foreign Earned Income Exclusion Amount
For tax years beginning in 2025, the foreign earned income exclusion amount under Code Sec. 911(b)(2)(D)(i) is $130,000.
U.S. Savings Bond Interest Exclusion for Higher Education Expenses
The exclusion from income for U.S. savings bond interest for taxpayers who pay qualified higher education expenses, begins to phase out for modified adjusted gross income above $149,250 for joint returns and $99,500 for all other returns. The exclusion is completely phased out for modified adjusted gross income of $179,250 for joint returns and $114,500 for all other returns.
Interest on Education Loans
For tax years beginning in 2025, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income in excess of $85,000 and $170,000 for joint returns, and is completely phased out for taxpayers with modified adjusted gross income of $100,000 or more and $200,000 or more for joint returns.
Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns
For tax years beginning in 2025, for purposes of defining the term "unrelated trade or business" for certain exempt organizations under Code Sec. 513(h)(2), "low cost articles" are articles costing $13.60 or less.
For tax years beginning in 2025, under Code Sec. 170, the $5, $25, and $50 guidelines in Section 3 of Rev. Proc. 90-12, for the value of insubstantial benefits that may be received by a donor in return for a contribution, without causing the contribution to fail to be fully deductible, are $13.60, $68.00, and $136, respectively.
Medical Savings Accounts
For 2025, for purposes of medical savings accounts, a "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,850 and not more than $4,300, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $5,570.
For family coverage in tax years beginning in 2025, the term "high deductible health plan" means a health plan that has an annual deductible that is not less than $5,700 and not more than $8,550, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $10,500.
Long-Term Care Premiums
For 2025, the limitations for eligible long-term care premiums includible in the term "medical care" are: for individuals 40 years or less before the close of the tax year, $480; for individuals more than 40 but not more than 50, $900; more than 50 but not more than 60, $1,800; more than 60 but not more than 70, $4,810; and more than 70, $6,020.
Periodic Payments Received under Qualified Long-Term Care Insurance Contracts or under Certain Life Insurance Contracts
For calendar year 2025, the stated dollar amount of the per diem limitation under Code Sec. 7702B(d)(4), regarding periodic payments received under a qualified long-term care insurance contract or periodic payments received under a life insurance contract that are treated as paid by reason of the death of a chronically ill individual, is $420.
Attorney Fee Award Limitation
The attorney fee award limitation is $250 per hour.
Child Adoptions
The credit allowed for an adoption in 2025 of a child with special needs is $17,280. The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $17,280. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $259,190 and is completely phased out for taxpayers with modified adjusted gross income of $299,190 or more.
Qualified Transportation Fringe Benefit
For tax years beginning in 2025, the monthly limitation regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $325. The monthly limitation for the fringe benefit exclusion amount for qualified parking is $325.
Certain Expenses of Elementary and Secondary School Teachers
For tax years beginning in 2025, the amount of the deduction for expenses paid or incurred by an eligible educator in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by an eligible educator in the classroom is $300.
Transportation Mainline Pipeline Construction Industry Optional Expense Substantiation Rules for Payments to Employees under Accountable Plan
For calendar year 2025, an eligible employer may pay certain welders and heavy equipment mechanics an amount of up to $22 per hour for rig-related expenses that are deemed substantiated under an accountable plan if paid in accordance with Rev. Proc. 2002-41. If the employer provides fuel or otherwise reimburses fuel expenses, up to $14 per hour is deemed substantiated if paid under Rev. Proc. 2002-41.
Refundable Credit for Coverage under a Qualified Health Plan
For tax years beginning in 2025, the limitation on tax imposed for excess advance credit payments under Code Sec. 36B where household income is less than 200% of the poverty line is $375 for unmarried individuals other than surviving spouses and heads of household and $750 for all other taxpayers. Where household income is at least 200% of the poverty line but less than 300%, those amounts are $975 and $1,950. Where household income is at least 300% but less than 400%, those amounts are $1,625 and $3,250.
Expatriation to Avoid Tax
For calendar year 2025, under Code Sec. 877A(g)(1)(A), unless an exception under Code Sec. 877A(g)(1)(B) applies, an individual is a covered expatriate if the individual's "average annual net income tax" for the five tax years ending before the expatriation date is more than $206,000.
Tax Responsibilities of Expatriation
For tax years beginning in 2025, the amount that would be includible in the gross income of a covered expatriate by reason of Code Sec. 877A(a)(1) is reduced (but not below zero) by $890,000.
Notice of Large Gifts Received from Foreign Persons
For tax years beginning in 2025, recipients of gifts from certain foreign persons must report these gifts if the aggregate value of gifts received in the tax year exceeds $20,116.
Persons Against Whom a Federal Tax Lien Is Not Valid
For calendar year 2025, a federal tax lien is not valid against (1) certain purchasers under Code Sec. 6323(b)(4) who purchased personal property in a casual sale for less than $1,960, or (2) a mechanic's lienor under Code Sec. 6323(b)(7) who repaired or improved certain residential property if the contract price with the owner is not more than $9,790.
Property Exempt from Levy
For calendar year 2025, the value of property exempt from levy under Code Sec. 6334(a)(2) (i.e., fuel, provisions, furniture, and other household personal effects, as well as arms for personal use, livestock, and poultry) cannot exceed $11,710. The value of property exempt from levy under Code Sec. 6334(a)(3) (books and tools necessary for the trade, business, or profession of the taxpayer) cannot exceed $5,860.
Revocation or Denial of Passport in Case of Certain Tax Delinquencies
For calendar year 2025, the amount of a serious delinquent tax debt for which a taxpayer's passport may be revoked or denied is $64,000.
Social Security COLA Adjustments
In January 2025, a 2.5 percent cost-of-living adjustment (COLA) will take effect with respect to benefits payable to nearly 68 million social security beneficiaries. Increased payments to nearly 7.5 million supplemental security income (SSI) beneficiaries will begin on December 31, 2024. The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor's Bureau of Labor Statistics.
The Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to tax for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. This annual limit is referred to as the contribution and benefit base.
For 2025, the maximum amount of an individual's earnings subject to social security tax is $176,100. The OASDI tax rate for wages paid in 2025 is set by statute at 6.2 percent for employees and employers, each. Thus, an individual with wages equal to or larger than $176,100 will contribute $10,918.20 to the OASDI program in 2025, and his or her employer will contribute the same amount. The OASDI tax rate for self-employment income in 2025 is 12.4 percent.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com
We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.
Try Our Easy, Powerful Search Engine
A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play
Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.
Dear Tax Professional,
My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.
Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.
To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.
Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.
Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!
Sincerely,
James Levey
Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com
|
