Your Planning Guide to 2025 Taxes

The IRS recently released its inflation adjustments for 2025 related to personal income tax, retirement contributions, estate taxes, and Social Security benefits. While these changes won’t affect the tax return you’ll be filing in a few months, they will be helpful as you start planning for the year to come.

With a new administration taking over in Washington in January, along with the potential sunsetting of many aspects of the Tax Cuts & Jobs Act, there is an expectation that significant tax legislation will be introduced in 2025.  While it’s possible there will be tax law changes that affect these numbers, it’s more likely that any changes will be effective in 2026.  As always, Baird will continue to monitor any legislation and be ready with any updates as they happen.

Personal Income Tax

The standard deduction is increasing in 2025, which means a bigger tax break for you, as more of your income is automatically exempt from tax. 

The new standard deductions for 2025:

• Married filing jointly: $30,000, up $800 from 2024
• Single taxpayers and married individuals filing separately: $15,000, up $400
• Heads of households: $22,500, up $600
• Additionally, retired married couples receive an additional standard deduction of $1,600 for each spouse age 65+.  Single individuals receive an additional $2,000.

Takeaway: This increase will make it more difficult to itemize your deductions in 2025, which means your tax payments, mortgage interest and charitable contributions are less likely to provide you a tax benefit. With the standard deduction potentially falling significantly in 2026, you may want to consider a “bunching” strategy, such as deferring charitable contributions from 2025 to 2026 where they may provide greater tax savings.

Retirement Savings Contributions

The 401(k) contribution limit is rising by $500, to $23,500. The overall savings limit, referred to as the 415 limit, is also increasing $1,000 to $70,000. This includes your own savings plus any matching or profit-sharing contributions from your employer. While catch-up contributions for participants aged 50 and up will remain at $7,500, the IRS is introducing a new “super catch-up” contribution limit for older employees. Beginning in 2025, individuals aged 60-63 can contribute an additional $3,750 to their employer-sponsored retirement plans, for a total catch-up amount of $11,250.

Traditional and Roth IRA contribution limits will hold at $7,000, though who can qualify for a Roth contribution will change: Married couples with income below $236,000 will be able to make a full Roth contribution next year, as will singles below $150,000. Those are up from $230,000 and $146,000, respectively, in 2024. 

Takeaway: Make sure you assess your retirement contributions to ensure you’re maximizing your benefits. Keep in mind the phaseout ranges have changed; couples with income over $246,000 (and singles over $165,000) will not be eligible to contribute to a Roth IRA next year. Barring any legislative or other changes, remains an option for those over the applicable income levels. 

Social Security

Social Security and Supplemental Security Income (SSI) benefits will increase 2.5% in 2025, an average increase of almost $48 per month.  This adjustment is notably smaller when compared to the recent years’ 5-8% increases that were in response to high inflation.

Takeaway: While inflation has slowed compared to the start of 2024, prices continue to be higher than previous years and may require you to review your cash flow strategy for the year to come.

As always, retirees have many factors to consider when choosing their start date for benefits – including how your start date could impact the surviving spouse – so it’s best to weigh all your options with your Baird Financial Advisor before deciding when to begin benefits.

Estate Taxes and Gifting

The gift tax annual exclusion is increasing from $18,000 to $19,000 for 2025 – the fourth consecutive year the gift limit has increased. Individuals can gift up to this amount to any number of individuals in 2025 without incurring gift tax or using any of the taxpayer’s lifetime exemption. Married couples can each use this exemption, allowing them to gift up to $38,000 annually to each recipient in 2025.

In addition, the lifetime exemption amount increased $380,000 per person, up to $13.99 million per individual. This increase means that a married couple can shield a total of $27.98 million from federal estate or gift tax. Those individuals who used their full exemption in recent years will now be able to make an additional tax-free gift to family members or others.

Takeaway: Note that the exemption is still set to sunset back by more than 50% at the beginning of 2026. Your Baird Financial Advisor can be a resource for tax planning strategies to effectively transfer this wealth to maximize this exemption.

Although these changes won’t affect you until you file your 2025 taxes in the spring of 2026, they can be of tremendous help in your tax planning over the course of the year. Remember that certain kinds of planning strategies can take months or even years to implement. To get out in front of your taxes for next year and beyond, reach out to your Baird Financial Advisor.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.