This article is reprinted with permission from Esq. Wealth Management, Inc.
Are you prepared for the evolving tax landscape in 2025? With inflation-adjusted changes to tax brackets, deductions, and credits, taxpayers across all income levels will see notable shifts that could impact their financial plans. This guide not only highlights the most significant updates to the Tax Code for 2025 but also provides insights into how these changes might affect you. Whether you’re an individual, business owner, or investor, staying informed is the key to smarter financial decisions and minimizing surprises when tax season arrives.
2024—Interest Rates and Another Rise in Excess of 20%
A year ago, many believed that Federal Reserve rate cuts made because the Fed “can” rather than because they “must” would benefit investors. While no one can consistently predict the peaks and valleys of the stock market, history shows that rate cuts tied to weak economic growth (the “must” cut scenario) have often failed to spur market gains.
For instance, recessions in 1974, 1990, 2001, and 2008 saw the Fed’s rate cuts fail to prevent stock market declines until investors began to anticipate economic recovery. However, in 2024, Fed officials signaled rate cuts driven not by fears of a damaging recession but by expectations of a slowdown in inflation—a “can” cut scenario.
Although inflation remains above the Federal Reserve’s annual target of 2%, its gradual slowdown in 2024 prompted the Fed to implement three consecutive rate cuts beginning in September. By year-end, the federal funds rate had been reduced by a full percentage point, settling at 4.25–4.50%.
The economy continues to expand, and with it, most major corporations are generating significant profits, according to LSEG.
The U.S. economy continues to expand, with many major corporations reporting significant profits, according to LSEG. This combination of easier monetary policy, economic growth, and strong corporate earnings drove the S&P 500 to its second consecutive annual gain of over 20%—a feat not seen since the late 1990s, as reported by The Wall Street Journal. While other factors contributed to this remarkable performance, the solid economic fundamentals played a pivotal role in shaping last year’s returns.
Table 1: Key Index Returns | ||
Index | MTD % | YTD % |
Dow Jones Industrial Average | -5.3 | 12.9 |
NASDAQ Composite | 0.5 | 28.6 |
S&P 500 Index | -2.5 | 23.3 |
Russell 2000 Index | -8.4 | 10.0 |
MSCI World ex-U.S.A.** | -2.8 | 2.0 |
MSCI Emerging Markets** | -0.3 | 5.1 |
Bloomberg U.S. Agg Total Return | -1.6 | 1.3 |
Source: The Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
MTD returns: November 29, 2024–December 31, 2024
YTD returns: December 29, 2023–December 31, 2024
**in US dollars
It’s worth noting the significant performance difference between the Dow Jones Industrial Average and the S&P 500 Index in 2024. This discrepancy is partly due to the differing methodologies used to calculate these indexes.
The S&P 500’s impressive growth was heavily influenced by the performance of mega-cap technology stocks. According to Barron’s and Dow Jones Market Data, seven large tech companies, dubbed the “Magnificent 7,” accounted for over half the gains in the S&P 500—a continuation of their strong performance from 2023.
2025—The New Year
As we enter 2025, many of the factors that drove market gains in 2024 remain in place. The U.S. economy continues to expand, and corporate profits are projected to maintain their upward trajectory. While the Federal Reserve is considering fewer rate cuts this year, it has not signaled any intent to raise rates.
Additionally, the incoming Trump Administration is expected to implement business-friendly policies, such as deregulation, that could further support economic growth and corporate profitability. A reduction in the corporate tax rate and additional corporate stock buybacks may also provide a boost to equity markets.
Potential Challenges in 2025
While optimism is high, no one can predict the future with certainty. Several potential pitfalls could disrupt the markets:
- Rebounding Inflation: A resurgence in inflation could force the Fed to raise interest rates, creating uncertainty for a market that is currently valued at premium levels.
- Economic Missteps: If the Fed underestimates economic risks, a deteriorating outlook could weigh heavily on corporate profits.
- Policy Risks: Although pro-business policies have bolstered post-election optimism, sweeping tariffs could increase inflation and slow economic growth. A similar scenario in 2018 led to heightened market volatility.
Despite the Fed’s multiple rate cuts in 2024, longer-term Treasury bond yields surged over the last three months, driven by slower inflation progress, strong economic growth, and a persistently high federal deficit. If bond yields continue to rise, they could present a significant headwind for stocks in 2025.
Changes to the Tax Code
In late 2024, the Internal Revenue Service announced adjustments to over 60 tax provisions, many of which will significantly impact taxpayers when filing their 2025 returns in 2026. These updates, largely driven by inflation, affect key areas like tax brackets, deductions, and exemptions.
While inflation adjustments are built into the tax code, they do not apply universally. It’s essential to understand which provisions are impacted and how these changes might affect your financial planning.
Below, we highlight the most significant updates to the tax code. If you have any questions or need personalized guidance, feel free to reach out to us. For specific tax questions, consulting your tax advisor is always recommended.
1. Tax Brackets
The IRS has adjusted the seven federal tax brackets for 2025 to account for inflation. Table 2 outlines the updated brackets for single filers, married couples, heads of households, and married individuals filing separately.
Table 2: 2025 Tax Tables | ||||
Taxable income ($) | Base amount of tax ($) | Plus | Marginal tax rate | Of the amount over ($) |
Single | ||||
0 to 11,925 | + | 10.0 | ||
11,926 to 48,475 | 1,192.00 | + | 12.0 | 11,925.00 |
48,476 to 103,350 | 5,578.00 | + | 22.0 | 48,475.00 |
103,351 to 197,300 | 17,651.00 | + | 24.0 | 103,350.00 |
197,301 to 250,525 | 40,199.00 | + | 32.0 | 197,300.00 |
250,526 to 626,350 | 57,231.00 | + | 35.0 | 250,525.00 |
Over 626,350 | 188,769.75 | + | 37.0 | 626,350.00 |
Married filing jointly and surviving spouses | ||||
0 to 23,850 | + | 10.0 | ||
23,851 to 96,950 | 2,385.00 | + | 12.0 | 23,850.00 |
96,951 to 206,700 | 11,157.00 | + | 22.0 | 96,950.00 |
206,700 to 394,600 | 35,302.00 | + | 24.0 | 206,700.00 |
394,601 to 501,050 | 80,398.00 | + | 32.0 | 394,600.00 |
501,051 to 751,600 | 114,162.00 | + | 35.0 | 501,050.00 |
Over 751,600 | 202,154.50 | + | 37.0 | 751,600.00 |
Head of household | ||||
0 to 17,000 | + | 10.0 | ||
17,001 to 64,850 | 1,700.00 | + | 12.0 | 17,000.00 |
64,851 to 103,350 | 7,442.00 | + | 22.0 | 64,850.00 |
103,351 to 197,300 | 15,912.00 | + | 24.0 | 103,350.00 |
197,301 to 250,500 | 38,460.00 | + | 32.0 | 197,300.00 |
250,502 to 626,350 | 55,484.00 | + | 35.0 | 250,500.00 |
Over 626,350 | 187,031.50 | + | 37.0 | 626,350.00 |
Married filing separately | ||||
0 to 11,925 | + | 10.0 | ||
11,926 to 48,475 | 1,192.00 | + | 12.0 | 11,925.00 |
48,476 to 103,350 | 5,578.50 | + | 22.0 | 48,475.00 |
103,351 to 197,300 | 17,651.00 | + | 24.0 | 103,350.00 |
197,301 to 250,525 | 40,199.00 | + | 32.0 | 197,300.00 |
250,526 to 375,800 | 57,231.00 | + | 35.0 | 250,525.00 |
Over 375,800 | 101,077.25 | + | 37.0 | 375,800.00 |
Sources: Tax Foundation, IRS
Generally speaking, the rates in Table 2 are applied to taxable income—income less the standard deduction or itemized deductions, whichever is higher. In other words, if you are married and filing jointly and taxable income is $50,000, the first $23,850 is taxed at 10%, and the remaining income is taxed at 12%. This does not include tax credits or self-employment tax.
Table 3: Estates and Trusts | ||||
Taxable income ($) | Base amount of tax ($) | Plus | Marginal tax rate | Of the amount over ($) |
0 to 3,150 | + | 10.0 | ||
3,151 to 11,450 | 315.00 | + | 24.0 | 3,150.00 |
11,451 to 15,650 | 2,307.00 | + | 35.0 | 11,450.00 |
Over 15,650 | 3,777.00 | + | 37.0 | 15,650.00 |
Source: IRS
The standard rules apply to these four tax brackets. For example, if a trust has $10,000 in income during 2025, taxes would be calculated as follows:
- 10% of $3,150 (earnings between $0 – $3,100) = $315
- 24% of $6,850 (earnings between $3,101 – $10,000) = $1,644
- Add the two together, and total federal taxes due = $1,959
2. Standard Deduction Increases
The IRS has announced inflation-adjusted increases to the standard deduction for the 2025 tax year:
- Single Filers and Married Filing Separately: The standard deduction rises to $15,000, a $400 increase from 2024.
- Married Filing Jointly: The deduction increases to $30,000, up $800 from 2024.
- Heads of Households: The deduction is now $22,500, a $600 increase from the prior year.
- Additional Deductions for Seniors:
- Single filers and heads of households aged 65 and older will see their additional deduction rise from $1,950 to $2,000.
- For married couples filing jointly, the additional deduction for each qualifying spouse will increase from $1,550 to $1,600, or a total of $100 for both spouses.
3. Alternative Minimum Tax (AMT) Exemptions
For 2025, AMT exemption amounts have been adjusted for inflation:
- Unmarried Individuals: The exemption is $88,100, phasing out at $626,350.
- Married Filing Separately: The exemption is $68,650, with phaseout beginning at $626,350.
- Married Filing Jointly: The exemption rises to $137,000, phasing out at $1,252,700.
4. Child Tax Credit
The maximum child tax credit remains at $2,000 per qualifying child. This amount is not adjusted for inflation. However, the refundable portion, adjusted for inflation, will remain at $1,700 for 2025.
5. Gift and Estate Tax Exemptions
Estate and gift tax exemptions continue to rise:
- Lifetime Gift and Estate Tax Exemption: Increased to $14.0 million per individual, up from $13.6 million in 2024.
- Annual Gift Tax Exclusion: Increased to $19,000, a $1,000 increase over 2024. This exclusion applies without affecting the lifetime exemption.
6. Favorable Treatment for Long-Term Capital Gains
Investors continue to benefit from the preferential tax treatment of long-term capital gains and qualified dividends:
- Long-Term Capital Gains: Profits from assets held for more than one year are taxed at lower rates than short-term gains, which are treated as ordinary income.
- Qualified Dividends: These remain eligible for lower tax rates, aligning with long-term capital gains rates.
Table 4: 2025 Tax Rates on Long-Term Capital Gains and Qualified Dividends | |
Taxable income | Tax rate |
If taxable income falls below $48,350 (single/married-filing separately), $96,700 (joint), $64,750 (head of household), $3,250 (estates) | 0% |
If taxable income falls at or above $48,350 (single/married-filing separately), $96,700 (joint), $64,750 (head of household), $3,250 (estates) | 15% |
If income falls at or above $533,400 (single), $300,000 (married-filing separately), $600,050 (joint), $566,700 (head of household), $15,900 (estates) | 20% |
3.8% tax on lesser of net investment income or excess of MAGI over | |
Married, filing jointly | $250,000 |
Single | $200,000 |
Married, filing separately | $125,000 |
Source: IRS
7. Pass-Through Business Deduction
The Tax Cuts and Jobs Act (TCJA) of 2017 includes a 20% deduction for qualified pass-through business income. However, this deduction is subject to income limits that phase in for higher earners.
- In 2025, the income thresholds for the phase-in are:
- $197,300 for single filers
- $394,600 for joint filers
- For comparison, the 2024 thresholds were $191,950 and $383,900, respectively.
Pass-through businesses should carefully evaluate these thresholds when planning for the year ahead.
8. Other Taxes and Credits
Net Investment Income Tax (NIIT)
High-income taxpayers are subject to a 3.8% net investment income tax, which applies to the lesser of:
- Net investment income, or
- The excess of modified adjusted gross income (MAGI) over specific thresholds:
- $200,000 for single and head-of-household filers
- $250,000 for married filing jointly or qualifying surviving spouse
- $125,000 for married filing separately
Key Details:
- These thresholds are not indexed to inflation.
- Net investment income generally includes interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.
- Excluded from net investment income: Wages, unemployment compensation, Social Security benefits, alimony, and most self-employment income.
Kiddie Tax
The kiddie tax applies to unearned income for children under 19 (or under 24 if a full-time student). For 2025, the exemption rises by $100 to $2,700, according to the IRS.
- Parents can elect to include a child’s income on their return if:
- The child’s income exceeds $1,350 but is less than $13,500.
- For 2024, these amounts were $1,300 and $13,000, respectively.
Adoption Tax Credit
For 2025, the maximum adoption tax credit for qualified expenses increases to $17,280, up from $16,810 in 2024.
- Phaseout Range:
- Begins for taxpayers with MAGI above $259,190.
- Fully phases out at $299,190 or higher.
- Key Details:
- The credit is non-refundable, meaning it cannot exceed your tax liability.
- Unused credit amounts can be carried forward for up to five years.
IRA contributions
The contribution limits for Individual Retirement Accounts (IRAs) have increased slightly, providing taxpayers with an opportunity to boost their retirement savings.
- 2024 and 2025 Contribution Limits:
- $7,000 for individuals under age 50
- $8,000 for individuals age 50 and older (includes a $1,000 catch-up contribution)
- Comparison to 2023 Limits:
- $6,500 for individuals under age 50
- $7,500 for individuals age 50 and older
- Key Deadline:
You can make contributions for the 2025 tax year until April 15, 2026, the federal tax filing deadline.
SEP-IRA Limits
Simplified Employee Pension (SEP-IRA) plans offer another powerful retirement savings tool, particularly for self-employed individuals and small business owners.
- 2025 Contribution Limit:
- Up to 25% of an employee’s total compensation, capped at $70,000 (an increase of $1,000 from 2024).
- Contributions must be made by the employer.
- Self-Employed Contributions:
- Self-employed individuals may contribute as their own employer.
- Contributions are generally limited to 20% of net income.
Changes may be on the horizon
The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the tax code, simplifying the filing process for many taxpayers. It increased the standard deduction, which eliminated the need for many to itemize, but also scrapped the personal exemption.
However, unless extended, many TCJA provisions are set to expire at the end of 2025, reverting to pre-TCJA rules for the 2026 tax year. While Republicans generally support a broad extension of the TCJA, the outcome of legislative negotiations remains uncertain.
Key Changes if the TCJA Sunsets
If the TCJA is allowed to expire, here are the expected changes:
- Marginal Tax Rates: Individual rates will revert to pre-TCJA levels, with the top rate increasing from 37% to 39.6%.
- Standard Deduction:
- Single filers: Reduced to approximately $8,300 (from $15,000).
- Married filing jointly: Reduced to $16,600 (from $30,000).
- Child Tax Credit: Reduced to $1,000 from $2,000.
- Personal Exemption: Reinstated at an estimated value of $5,300 (per the Tax Foundation).
- Gift and Estate Tax Exemption: Decreased to approximately $7.5 million, down from $14.0 million.
- State and Local Tax (SALT) Deduction Cap: The $10,000 cap will be removed, allowing for full itemization.
- Pass-Through Business Deduction: The 20% deduction for pass-through income will be eliminated.
These potential changes highlight the importance of proactive tax planning to minimize your liability and maximize your financial outcomes.
Final Thoughts
A diversified portfolio cannot entirely shield you from market volatility, but it can help reduce risk and has historically been one of the most effective ways to achieve financial goals.
At EsqWealth, our approach is grounded in both real-world experience and academic research. While markets may face periods of underperformance, patient and disciplined investors have historically been rewarded over the long term.
We hope you’ve found this review informative and helpful. If you have any questions or wish to discuss your financial planning needs, please don’t hesitate to reach out.
As we say goodbye to 2024, we look forward to a New Year filled with opportunities, adventure, and joy. May 2025 bring you cherished memories and success in all your endeavors. Happy New Year from all of us at EsqWealth!
The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.