Navigating 2025 Tax Brackets and Beyond: Essential Tips for Tax Planning

As we enter 2025, the IRS has updated income tax brackets to account for inflation. These adjustments may sound minor, but they play a crucial role in tax planning—particularly if you’re saving for retirement. Here’s a breakdown of the new brackets, the changes to the standard deduction, and why understanding these updates can help you avoid “bracket creep” and make better financial choices.

What’s New with the 2025 Tax Brackets?

For 2025, the IRS has adjusted income brackets slightly higher to keep pace with inflation. The idea is to prevent “bracket creep,” a phenomenon where inflation pushes you into a higher tax bracket, even though your purchasing power hasn’t increased. It’s like getting a pay raise that’s immediately eaten up by inflation—you might be in a higher tax bracket, but you’re not actually making more in real terms.

Tax Bracket Breakdown:

For example, here are some adjustments:

• The 10% bracket now covers up to $23,200 for married couples filing jointly, up from $22,000 in 2024.
• The 12% bracket extends up to $94,300.
• The 22% bracket reaches $201,050.

These adjustments apply to taxable income, not total income, which means they take effect after deductions and credits.

Example Scenario:

If a married couple’s taxable income is $100,000, they would fall primarily into the 10% and 12% brackets rather than moving into the 22% bracket, potentially lowering their tax bill compared to what it would be without inflation adjustments.

Standard Deduction Update

The standard deduction has also increased:

• For married couples filing jointly, it’s now $29,200 (up from $27,700).
• For single filers, it’s $14,600 (up from $13,850).

This higher standard deduction means more of your income is protected from taxes, especially helpful for those who don’t itemize deductions. If your itemized deductions don’t exceed this new amount, you might find it simpler and more advantageous to use the standard deduction.

The Sunset of the Tax Cuts and Jobs Act

A big change is coming after 2025 when provisions from the Tax Cuts and Jobs Act (TCJA) are set to expire. This “sunset” will shift tax rates back to higher levels. Here’s how:

• The 12% bracket will revert to 15%.
• The 22% and 24% brackets will merge into 25%.
• The 32% bracket will rise to 33%, and the top 37% bracket will revert to 39.6%.

For many pre-retirees, this change could mean paying more in taxes starting in 2026. Planning strategies like Roth conversions during these lower-tax years or maximizing tax-deferred contributions now might offer long-term savings.

Why This Matters for Your Retirement Planning

If you’re nearing retirement, the sunset could impact your tax obligations just as you’re entering a fixed income phase. This is where long-term planning becomes critical. With tax brackets potentially rising, now could be the right time to work on strategies like:

• Accelerating income while tax rates are lower.
• Considering Roth conversions for tax diversification.
• Maximizing retirement contributions to reduce taxable income.

Looking Ahead

The IRS’s adjustments are intended to make sure inflation doesn’t unfairly push you into higher tax brackets, but staying proactive with personalized tax planning is key. Tax rates, bracket structures, and even deductions may change, but your preparation today can ease the impact of these shifts on your financial future.

As always, remember that there’s no one-size-fits-all solution; your financial plan should fit your unique needs. With proper planning, you can manage these tax changes and stay on track for a comfortable retirement.

Sources:

https://www.thetaxadviser.com/issues/2023/dec/tax-planning-for-the-tcjas-sunset.html

https://www.kiplinger.com/taxes/new-income-tax-brackets-are-set

This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. MOKAN Wealth Management is a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.

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