At the end of the year the federal government comes out with new numbers relating to the standard deduction, retirement account contribution limits, tax bracket changes, tax deduction or tax credit changes, Social Security adjustments, Medicare increases or decreases, and maybe a change or two in the federal tax code. This month's newsletter will address those changes for 2025.
The standard deduction is going up to $15,000 for single people, 22,500 for head of household, and $30,000 for married folks filing a joint return. The numbers are slightly higher if you are over 65 ($17,000 single and joint is $33,200 if both are 65). These are the amounts you can earn in 2025 without paying federal income tax. You can see the new federal brackets here. Note the comments throughout.
Iowa income tax rates will be going down in 2025 to a flat rate of 3.8% on all earned income no matter how much you earn. If you are receiving retirement income such as IPERs, a 401(k) or a Traditional IRA, you will pay no state tax in Iowa as long as you are 55 years of age (includes Roth conversions). For those of you who live outside of Iowa, go here to learn about tax rates in your state.
Social Security goes up by 2.5% for 2025 as it adjusts for inflation. If you are waiting on your benefit between age 62 and FRA, that equals a 9.5% return (7 + 2.5). If you are at FRA and waiting until 70, that equals a 10.5% return (8 + 2.5). $176,100 is the new amount where you stop paying into Social Security (still pay into Medicare). The FICA tax of 7.65% for the employee and employer has not changed.
Medicare costs will go up in 2025. The Part B premium will be $185.00 and the Part B deductible will be $257 in 2025. The average premium for Part D is estimated to be $45 in 2025. The Part D deductible for 2025 will be $590. The Part A deductible will be $1,676 (no premiums). If your Part B premiums they looked back two years and showed a bunch of income. You can challenge that!
Contribution limits on IRAs stay at $7,000 and for those over 50, it is $8,000. The contribution limit on the 401(k), 457, 403(b), and TSP goes to $23,500 with those over 50 seeing an increase to $31,000. The Roth 401(k), 457, 403(b), TSP, is a better option when you are in the 10% or 12% bracket. Traditional contributions might be warranted at the higher tax brackets. Get that Roth IRA maxed out!
For small business owners/employees, there are changes. You can now invest via Roth in a Simple IRA or SEP-IRA starting in 2025. Check with your employer and see if they are offering the Roth option (it is not mandatory). The contribution limit on Simple IRAs goes to $16,500/$20,000 based on being under/over 50. SEP-IRA contributions limits are more complicated. Learn more here.
If you are over 50 you can still contribute to a 401(k)/457/403(b)/TSP pre-tax for 2025. Starting in 2026, all catch up contributions must go in Roth if your gross income is $145,000 or higher (it will probably be higher in 2026). There is something BIG and new. If you are 60, 61, 62, or 63, you can put in an extra $11,250 into the account (employer has to implement this). It is called the super catch-up!
Tax deductions and tax credits have not changed much. The child tax credit will be $2,000 for children under age 17 (there are income limits that reduce the size of this credit). There is a $500 credit for those dependents 17 and older. Learn more about refundable credits. Tax credits are better than tax deductions as you eliminate taxes owed dollar for dollar. Learn more here.
There are no real changes in the capital gains tax. As a reminder, a single person can make $250,000 and a married person filing a joint return $500,000, without paying any capital gains tax when selling a property they have owned and lived in for 2 years. Selling a rental property will incur a capital gains tax based on how long you have owned it and the size of the gain in relation to that year's other income.
Long term capital gains are still taxed at 0%, 15%, or 20% based on what bracket you are in, when incurring the capital gain. The goal is to receive long term capital gains (investments held more than 1 year) while staying inside the 10% or 12% federal tax brackets. Why? The tax will be 0%! When you sell an investment with a capital gain attached to it, your current tax bracket means a lot!
The IRS created a mess with the new inherited IRA rules. This rule applies to receiving the IRA from someone who passed after December 31, 2019. No RMD was required in 2020, 2021, 2022 or 2023 because of the poor rollout. The 10-year rule applies to this RMD. If the deceased was taking their RMD, you must take it each year for 10 years. If not, you have a span of 10 years to take it out.
There are no inflation adjusted numbers related to the taxability of your Social Security benefit because Congress has not deemed that necessary. What does this mean? More and more people will have some of their Social Security benefits taxed at the federal level based on other income (IRA, pension, job, etc.). There has been talk about getting rid of this tax. Stay alert to possible changes in 2025 or 2026.
The health savings account (HSA) numbers have changed slightly. You and your employer can put in $4,300 if single and $8,550 for families. You can add an extra $1,000 to those amounts if you are over 55. If you are lucky enough to have an HSA, choose the Fidelity HSA. It is by far the best in the U.S. For flexible savings accounts (FSA), the max you can put in for 2025 will be $3,300.
What did the U.S. stock market return in 2024? Using VTSAX to track the total market, it returned 23.74%. What about VSIAX (small cap value)? That fund earned 12.54%. What have those two indexes returned over the last 52 years when starting with $10,000? The total U.S. stock market averaged 10.83% and ended up at $2,303,821. Small Cap Value averaged 12.39% and ended up at $8,989,838!
