Proactive tax planning throughout the year is the key to reducing taxes and maximizing your after-tax dollars for wealth accumulation. This is accomplished by applying changing tax laws to your specific situation. The IRS generally raises the income and contribution limits according to cost-of-living adjustments. With inflation rates coming down in 2023, and stabilizing for the most part in 2024, the Consumer Price Index (CPI) was 2.7% through November 2024 over the preceding 12 months, and slightly lower than the 3.1% in 2023. Each year the IRS provides updates to many key limits based on the prior year’s inflation that impact tax deductions, contributions, and other deferrals throughout the year. Some more and some less than 2.7%, and some without any increase. Below are some changes made for 2025:
Employer Retirement Accounts:
Elective Deferrals for 401k, 403b, and 457 Account Limits
Increased to $23,500 ($23,00 in 2023) while the catch-up is still at $7,500 for a total contribution of $31,000 for individuals 50 and older. This was one of the smallest increases in 2025 at only 1.6%.
Effective 2025, the Age 60-63 catch-up contribution is $11,250. This catch-up contribution is in lieu of the $7,500 catch-up, not in addition to.
Defined Contribution Limits
Increased to $70,000 ($69,000 in 2024), which is the total combined contributions by employee and employer.
The $7,500 employee contribution catch-up is on top of this, so the total for those 50-59, or 64 and older, the total contribution is $77,500, while for those 60-63, the total contribution is $81,250.
Maximum Includible Compensation Limit
Increased to $350,000 for 2025 ($345,000 in 2023), which is always five times the Defined Contribution annual limit. This applies to the amount of annual compensation that can receive a company match.
Defined Benefit Limit
Increased to $280,000 for 2025, which was previously at $275,000 in 2024. This is the maximum compensation that can be used toward calculating a pension benefit.
Simple IRA Contribution Limits
Increased to $16,500 for 2025 ($16,000 in 2024). This is the fourth consecutive annual increase while the catch-up contribution remains at $3,500.
Simple IRAs also have an alternative catch-up for age 60-63, which is $5,250.
Businesses with 25 or fewer employees are eligible for a 10% increase to these limits ($17,600 and $3,850 catch-up).
Individual Retirement Accounts:
Roth IRA and IRA Contribution Limit
No increase for the annual contribution or catch-up contribution, which remain at $7,000 and $1,000.
Roth IRA AGI Phaseout
Phaseout for Roth IRA contributions increased by 2.6% with the new 2025 Adjusted Gross Income (AGI) phaseout of $236,000-$246,000 for Married Filing Jointly (MFJ).
AGI phaseout for single taxpayers is $150,000-$165,000.
Deductible IRA Contribution Phaseout
AGI phaseout amounts for active participants is as follows:
- Single – $79,000-$89,000
- Married Filing Jointly – $126,000-$146,000
- Married Filing Separately – $0-$10,000
AGI phaseout for a non-active participant married to an active participant:
- $236,000-$246,000 (same as Roth IRA MFJ)
Social Security and Medicare:
Social Security Income
Cost-of-living adjustment is 2.5%
Wage base is $176,000 (up 4.4% from 2024). This is the maximum amount of earnings that can be taxed for Social Security. The wage base has historically been going up faster than the cost-of-living adjustment to improve the solvency of Social Security.
Medicare Part B:
Base tier premium is $185 per month (5.9% increase from 2024) – Adjusted Gross Income must be below $212,000 for MFJ or $106,000 for single taxpayers in 2023 to pay at the lowest tier.
Highest tier premium is $617 per month (3.9% increase from 2025) – Adjusted Gross income exceeds $750,000 for MFJ or $500,000 for single taxpayers in 2023 are subject to paying the highest rate.
Other Notable Limit Changes:
Qualified Charitable Distributions (QCDs)
Individuals age 70½ or older may transfer dollars from their Individual Retirement Accounts (IRA) directly to qualified charitable organizations tax-free. Since QCDs were enacted in 2006, the annual limit of this tax-free transfer has been steady at $100,000. However, effective in 2024, the limit is impacted by inflation just like most of the other annual limits. The limit went up to $105,000 in 2024, and now increased again in 2025 to $108,000 (2.9% increase).
Estate and Gift Tax
Annual family gift tax exclusion $19,000 (the highest inflation adjustment at a 5.6% increase from 2024 and the fourth consecutive year).
Estate and gift tax exclusion $13,990,000 (2.8% increase from 2024). I guess it was too much to give it a 2.9% increase to make it an even $14,000,000.
Health Savings Account Contribution Limits
Single $4,300 (3.6% increase from 2024)
Family $8,550 (3.0% increase from 2024). Why these don’t go up at the same rate and be twice the single limit, is beyond me.
Catch-up age 55 and older remains at $1,000
Flexible Spending Account (FSA) Contribution Limits
$3,300 (3.1% increase from 2024 – $3,200). The max carryover amount is $660 but is plan specific.
Standard Deduction
Single $15,000 (2.7% increase from 2024)
Married filing jointly $30,000
Head of household $22,500
Blind and elderly additional deduction is $1,600 or $2,000 if unmarried)
Who’s helping you?
At Total Wealth Planning we help our clients every day answer these important and at times stressful questions.
About the author: Chris Allen, CFP® is a wealth advisor and the Director of Financial Planning at Total Wealth Planning, a fee-only fiduciary financial planning firm in Cincinnati (Blue Ash), Ohio. Chris assists clients in creating a sound financial future while serving on the Firm’s Investment Policy Committee and technical financial planning team. Prior to joining the Firm in 2015, Chris worked as a Certified Financial Counselor with a non-profit financial counseling organization, where he consulted with numerous families and helped establish sustainable spending plans. Chris can be reached at callen@twpteam.com.
