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Financial planning for 2025 brackets and retirement rules

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Cooling inflation will bring some relief in the form of slightly lower taxes next year.

An average inflationary adjustment of 2.8% under IRS guidance for 2025 released earlier this month came in lower than the 5.4% hike for this year and a boost of more than 7% across the seven federal income brackets in 2023, according to an analysis by the nonpartisan, nonprofit Tax Foundation. 

At the same time, the slower rise in cost-of-living expenses this year led the agency’s subsequent annual announcement of the level of penalty-free limits on contributions to individual retirement accounts to stay the same, at $7,000. 

On the other hand, yearly contribution limits to 401(k), 403(b) and 457 retirement plans, as well as the federal government’s Thrift Savings Plan, will each rise by $500 in 2025 to $23,500 and a shift in the rules from the Secure 2.0 Act will give savers aged 60 to 63 a new “super catch-up” option for the first time.

READ MORE: With Congress slow to act, financial advisors plan ahead on estate taxes

The yearly protection against so-called bracket creep and the numbers involved with more than 60 other tax items put a bookend on “a continual conversation during the course of the year” about the question of “whether there are ways to reduce your income by booking losses” or “trying to take advantage of recognizing some income so you pay a lower amount of tax” for 2024 and 2025, according to Alan Weissberger, the senior tax and estate planning solution specialist with West Conshohocken, Pennsylvania-based Hirtle Callaghan. For financial advisors, tax professionals and their clients, the potential expiration of many provisions of the Tax Cuts and Jobs Act after 2025 is adding another layer to the standard year-end planning

“The actual inflation adjustment is relatively lower compared to what we’ve seen the last couple of years,” Weissberger said in an interview. “All things being equal, any taxpayer with the same amount of income is going to end up paying a little less in taxes.”

Experts often point out the significant differences in tax rates that come down to every single dollar worth of income. Via the Tax Foundation analysis, here’s how the federal tax brackets will look in 2025:

  • 10%: $0 to $11,925 (individuals or married filing separately); $0 to $23,850 (married filing jointly); $0 to $17,000 (heads of households)
  • 12%: $11,925 to $48,475; $23,850 to $96,950; $17,000 to $64,850
  • 22%: $48,475 to $103,350; $96,950 to $206,700; $64,850 to $103,350
  • 24%: $103,350 to $197,300; $206,700 to $394,600; $103,350 to $197,300
  • 32%: $197,300 to $250,525; $394,600 to $501,050; $197,300 to $250,500
  • 35%: $250,525 to $626,350; $501,050 to $751,600; $250,500 to $626,350
  • 37%: $626,350 or more; $751,600 or more; $626,350 or more

In terms of retirement savings, the two Secure Acts have altered many rules around planning. For example, many beneficiaries who have inherited IRAs know that they must begin taking their required minimum distributions in 2025 as part of a 10-year schedule that has replaced the “stretch” strategy after the IRS delayed that obligation for several years in a row.

READ MORE: Final IRS rules to IRA beneficiaries: Get going on those RMDs already

For 2025, the cost-of-living adjustments to retirement contributions did not make any impact on the ceiling on regular IRA contributions and the extra “catch-up” savings available to those 50 or older of $1,000. The “catch-up” contributions for 401(k) and other retirement-plan participants who are aged 50 or above will stay the same at $7,500, too. For those employee-plan participants between the ages of 60 and 63, a new “super catch-up” beginning next year will provide the flexibility to contribute as much as $11,250 on top of their allotted $23,500.

Those decisions could reverberate for decades in a saver’s portfolio, according to a blog earlier this year by financial educator Patrick Villanova for advisor matchmaking and personal finance service SmartAsset. Even though they started with the same value of $256,244 in their 401(k) at age 60, a sample investor named “Sam the Super Saver” racked up over $16,000 in additional savings compared to “Ian the Ignorer” by the time she turned 64 through the extra catch-up contributions. By their 90th birthdays, Sam had more than $23,000 more in portfolio value.

“Those extra dollars can add up over the course of a 25-year retirement and continue to compound along with retirement account investment growth,” Villanova wrote. “However, the potential long-term growth of those enhanced contributions simply may not be enough to entice some pre-retirees to save the extra money between ages 60 and 63.”

Planners and their clients will also be watching closely to see how this week’s election and the current sunset date at the end of 2025 for a lot of the Tax Cuts and Jobs Act affect their estate and income taxes. Absent Congressional action, the minimum value of estates subject to taxes as high as 40% will revert back to half its present level.

READ MORE: 30 tax questions to answer by the end of the year

Ultrahigh net worth families that are part of the base of Hirtle Callaghan’s clients generally fall into one of three categories around the estate tax, Weissberger noted. Some have been updating their plans every year, others shifted slightly in anticipation of potential tax changes during President Joe Biden’s term and the third group includes “some clients who have done absolutely nothing for any estate planning,” he said.

“A lot of clients haven’t done anything, and they’ve been waiting and thinking that this problem is eventually going to solve itself — which doesn’t look like it’s going to happen,” Weissberger said.

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Tech news: Sikich rolls out AI studio

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Plus, Thomson Reuters integrates AI CoCounsel with tax solutions; Sovos introduces 1099 Professional solution; and other accounting tech updates.

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On the move: Whitley Penn names next CEO

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IFAC offices

Jean Bouquot, previously deputy president, was elected president of the International Federation of Accountants to serve a two-year term through November 2026, and Taryn Rulton was elected deputy president. The IFAC also appointed to the board: Josephine Su Han Phan, Michael Niehues, Patricia Stock, Mark Vaessen, Lei Yan and Ahmad Almeghames. (Read the full story.) In other news, IFAC selected Sheila Fraser of Canada and Andreas Bergmann of Switzerland as the 2024 recipients of the IFAC Global Leadership, recognizing their outstanding contributions to public sector accounting.

Comedian Lil Wenker announced she is touring her solo show, “Bangtail,” a clown western about a cowboy-turned-accountant searching for his purpose, based on her accountant  father, which includes a performance Nov. 22 in New York. 

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Big tax changes promised in Trump administration

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President-elect Donald Trump offered up a long list of promises during his campaign, and next year will bring a major test with the upcoming expiration of many of the provisions from his first administration’s Tax Cuts and Jobs Act of 2017.

“No one has a crystal ball on what’s going to happen here, but certainly it’s a little bit clearer based on a Trump victory than it would have been based on a Harris victory,” said Brian Newman, a tax partner at Top 25 Firm CohnReznick in Hartford, Connecticut. “Obviously the big point is going to be either to extend or to make permanent TCJA provisions.”

Trump has also called for lowering the corporate tax rate, which was supposed to be made permanent with the TCJA. He has proposed to lower it to 20%, or 15% for companies that manufacture their products in the U.S. 

“Going from 21% down to 20% may be a much easier sell than layering on something that would get the corporate rate down to 15%,” said Newman.

Trump has also called for bringing back 100% bonus depreciation. “Right now the bonus rate is at 40% and scheduled to go down to 20% next year,” Newman continued. “There’s been a push to get that back up to 100%. If that occurs, we’ll be talking to our clients for year-end tax planning about deciding on whether to delay placing an asset in service a month or two if, in fact, we think that we’re going to go back to 100% bonus, versus buying something this year and placing it in service this year. There are always transition rules. That’s something that we have to be cautious about. That’s something that is going to be closely watched, because it could have a significant impact on clients.”

On the other hand, parts of the TCJA could be jettisoned. Trump has also called for eliminating the act’s $10,000 limit on state and local tax deductions, also known as the “SALT cap,” for individuals, or raising it. 

trump-donald-2024-campaign.jpg
Former President Donald Trump speaks during a campaign rally in Mason City, Iowa.

KC McGinnis/Bloomberg

“It’s an easy discussion to tell clients, if you have property taxes to pay, you’re probably better off paying the property taxes January 1 versus December 31 in the hopes that something does get passed,” said Newman. “You might get a benefit for it, versus now in 2024 you know you’re not going to get a benefit.”

The treatment of R&D expenses involves another provision of the TCJA that could be eliminated. “The last couple of years, taxpayers have had to capitalize their R&D costs and then amortize them over a five-year period,” said Newman. “That’s had a significant impact on compliance and the bottom line of taxable income. Trump has said that he would like to get those expenses currently deductible again, which would be helpful for businesses that have R&D expenses. 

The Section 163(j) limitation on business interest could be another area where TCJA provision would be eliminated. “Currently, your adjusted taxable income does not include adding back depreciation and amortization like it did in the first few years of the TCJA. President-elect Trump has said that he would be in favor of going back to an EBITDA calculation so that you can add back your depreciation and amortization, which would make the limitation less painful for clients. That’s another area that I think you’re going to see some tax law changes.”

Some of these business tax changes were passed by the House earlier this year as part of the Wyden-Smith Tax Relief for American Workers and Families Act of 2024 but never got through the Senate because of disagreement over other provisions, such as expansion of the Child Tax Credit.

Trump has also called for not taxing income from tips, Social Security and overtime, as well as eliminating taxes on firefighters, police officers and members of the military.

However, that could encourage people to reclassify their income as the tax-exempt kind. 

“It will always be interesting to see exactly how those things work and how they’re calculated, because everyone’s always looking to maximize what income is not subject to tax or may have lower tax rates,” said Newman. “But you have to make sure that you know, things are properly defined, and that ultimately, you know, we have a clear guidance on what the calculation should be.”

Trump has also called for eliminating the stock buyback excise tax for public companies that buy back their own shares of over $1 million in a taxable year. “Right now, there’s a 1% tax on that,” said Newman. “The Biden administration has proposed increasing that to 4%, but President-elect Trump has said that he would be in favor of eliminating that tax.”

He believes the qualified business income deduction under the TCJA will also be closely watched, “People would be looking for that to either get extended or made permanent,” said Newman. “That’s a 20% deduction on certain flow-through income, which has been very beneficial to people who it applies to. Unfortunately, it does not apply, for the most part, to accountants and other professional services organizations.”

Trump has also called for doubling the standard deduction as it was in the TCJA. That could cause even fewer people to itemize their deductions. “There’s a good amount of people who don’t itemize because the SALT cap is limited to $10,000 and then if you don’t have large home mortgage interest or other itemized deductions, you’re not getting over the standard deduction threshold as it currently stands,” said Newman. “If you double the standard deduction, there will be less and less itemizers, and those types of deductions don’t become as valuable.”

That may prompt donors to reduce their charitable contributions if they can’t itemize the deduction.

Trump has also called for other tax breaks, such as tax credits for family caregivers taking care of parents or loved ones, and allowing those who buy an automobile made in the U.S. to write off the interest on their car loans.

All those tax breaks may prove difficult for states that rely on income taxes from their residents and can’t afford to let their deficits run wild. “Year after year, the state tax liabilities on transactions and income are becoming more and more a larger component of the total tax burden of both companies and individuals,” said Newman. “One of the things that states like to do is decouple from federal provisions. We always want to keep in mind, even if you get new provisions at the federal level, if they’re not already decoupled, you may get decoupled on provisions for the state. For instance, if President-elect Trump is successful in exempting, say, overtime pay, you may get a lot of states decouple from that, and the states will still tax that.”

Trump’s tax policy will also depend on what Congress does and how much control Republicans will be able to exercise, especially in the House.

“Tax was not the focal point of the campaign, and when it did emerge as an issue, former (and future) President Trump presented tax policy ideas largely in broad strokes, though he also had no small number of new ideas for voters to consider,” said Jonathan Traub, managing principal and tax policy group leader at Deloitte Tax LLP, in a statement. “Of course, tax legislation generally originates in Congress, not the White House, so any new tax laws enacted will bear the imprint of the legislative branch with its many competing interests and priorities. And, just as importantly, the ability of the Republicans to use budget reconciliation to fast-track major tax and spending bills to the White House depends on the outcome of a handful of uncalled House races around the country.” 

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