Laura answers a listener's question about upcoming tax changes that could save money.
Laura answers a listener's question about upcoming tax changes that could save money.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Karim, who says:
"I understand that tax rules change every year. I'm curious about any upcoming adjustments or new regulations that could help me save money. My question is, how will my taxes change in 2025?"
Thanks, Karim! Yes, the Internal Revenue Service or IRS makes various tax changes annually to account for adjustments in the inflation rate. This post will review several upcoming tax adjustments for 2025. With some strategic tax planning, you can use them to cut your 2025 tax bill and save money!
I appreciate you listening to episode 887 of the Money Girl podcast! I'm Laura Adams, an award-winning author, female financial speaker, money spokesperson, and consumer advocate. Please reach out if you're interested in collaborating for a speaking event or PR campaign!
As always, you can reach me using my contact page at LauraDAdams.com. That's also where you can sign up for my free Substack newsletter, The Money Stack. Subscribers get my Money Success Toolkit, which includes a Financial Planning Workbook and Personal Financial Statement calculator to assess your financial situation, set goals, and track your wealth!
I'd love to feature your money question! Send it by email using my contact page at LauraDAdams.com or by calling 302-364-0308 to leave a message.
5 money-saving tax changes for 2025
According to a recent IRS notice, more than 60 changes will affect taxpayers when they file their 2025 tax returns in 2026. But I'm only going to cover the five most notable updates that could make the most significant impact on your finances and potential savings.
1. Workplace retirement plans.
The IRS announced higher contribution limits for some retirement plans in 2025. For example, if you have a workplace plan–like a 401(k), 403(b), or 457–the maximum will increase to $23,500, which is $500 more than for 2024. But the additional catch-up contribution allowed for participants over 50 will remain the same, at $7,500, for a total of $31,000.
However, a new regulation will allow older participants to invest even more in their workplace retirement accounts. These "super catch-up" contributions only apply to workers between 60 and 63. For 2025, they can contribute $11,250, for a total of $34,750 ($23,500 + $11,250).
Boosting contributions to a pre-tax, traditional retirement account means you reduce your taxable income for the year. For instance, if you earn $100,000 and contribute $20,000 to a 401(k), you only pay tax on $80,000.
While you don't receive an upfront tax benefit for contributing to a Roth at work, they may save you more over the long run, depending on your future tax rate. For instance, if you pay an average tax rate of 20% but expect it to be 30% in retirement, you're better off paying less tax now than later
Plus, a Roth account allows your investment earnings to grow tax-free. You can make tax-free withdrawals in retirement, which could add to massive tax savings on decades of growth!
LISTEN ALSO: What happens to a 401(k) when you die?
2. Individual retirement accounts (IRAs).
Unfortunately, the maximum you can contribute to a traditional or Roth IRA will remain at $7,000, the same as 2024. And those over 50 can invest up to an extra $1,000 in additional catch-up contributions, which is also the same for 2024.
But there is some good news for IRAs in 2025. There will be an increase in the earnings threshold for deductible contributions to a traditional IRA.
If you're a single taxpayer covered by a workplace retirement plan, you can deduct the maximum traditional IRA contribution if your modified adjusted gross income (MAGI) is $79,000 or less, up from $77,000 in 2024.
For married couples who file a joint tax return, the MAGI threshold for deducting the maximum contribution will rise to $126,000, up from $123,000 in 2024.
There is also a positive change that will allow more savers to qualify for a Roth IRA in 2025. Singles with a MAGI of up to $150,000 and married couples with a MAGI of up to $236,000 can max out a Roth IRA. That's up from $146,000 and $230,000 respectively for 2024.
RELATED: Think you're too rich for a Roth? Think again.
3. Medical savings accounts.
Some tax-advantaged medical savings, such as a health savings account (HSA) and flexible savings account (FSA), also will have higher contribution limits in 2025.
If you're enrolled in an HSA-qualified health plan through work or on your own, you can contribute to an HSA. You can invest the funds for growth and spend them tax-free on a broad range of eligible healthcare expenses.
For 2025, you can contribute up to $4,300 to an HSA with individual health coverage or $8,550 with family coverage. That's an increase of $150 and $250 from the 2024 limits.
Workers with the option to enroll in an FSA can contribute up to $3,300 in 2025, a $100 increase from 2024. Unlike an HSA, an FSA has an annual spending deadline for emptying your account. However, for FSAs that allow unused balances to roll over, the maximum amount will increase to $660 in 2025, a $20 increase from 2024.
If you qualify for an HSA or have access to an FSA at work (employers can only offer them), they're an excellent way to reduce your healthcare expenses. Some FSAs even allow you to pay for childcare expenses tax-free.
RELATED: 7 ways to cut healthcare costs
4. Tax brackets.
In the U.S., income tax rates are graduated, so you pay different rates on different amounts of taxable income. There are seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%, which will remain the same in 2025.
The higher your income, the higher your average tax rate will be. However, it's essential to understand that your highest tax bracket is not the rate you pay on all your income. You only pay the highest rate on the top slice of your income.
The IRS adjusts tax brackets annually to avoid "bracket creep," which happens when your income increases but you don't have an increase in real income due to inflation.
For 2025, the tax adjustments allow you to earn more without moving into a higher tax bracket and paying more tax.
The following tax rates will apply for 2025, which are slightly higher than 2024:
5. Standard deduction.
The standard tax deduction is a specific amount that reduces your taxable income based on factors like your filing status (such as single or married filing jointly) and age. But you can't claim it when you choose to itemize deductions on your return instead. You can choose the method that cuts your tax bill the most each year.
For 2025, the standard deduction will rise for singles to $15,000, an increase of $400 from 2024. It will be $30,000 for married couples filing joint taxes, an increase of $800. For those who file as heads of household, the standard deduction increases by $600 to $22,500.
In addition, those over 65 can take an additional standard deduction. For 2025, it will be $2,000 for singles and $1,600 per qualifying spouse. If you're over 65 and blind, the additional standard deduction gets doubled to $4,000 for singles and $3,200 per qualifying spouse. Those adjustments are a $50 increase from 2024.
READ ALSO: How can you reduce your taxes?
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.