The Internal Revenue Service (IRS) has announced that it will apply new regulations that will increase the limitations of the amounts that individuals can contribute to their pension and retirement plans.
The new year is quickly approaching, and with it comes the announcement that the IRS will implement these new policies. These adjustments are made as part of the annual cost-of-living adjustments for pension plans and other retirement accounts.
Additionally, this is done as part of a coordinated effort to enable older beneficiaries to increase the amount of money they have saved for retirement.
What Are the Increases proposed by the IRS?
The 401(k) plan, which is the most popular retirement account, will have its contribution maximum lifted in 2025. This will allow workers to set aside up to $23,500, which is a slight rise from the $23,000 cap that was in place in 2024 with regard to saving for retirement.
Not only is it the only plan that will boost its contributions, but people who are enrolled in 403(b) plans and the Thrift Savings Plan offered by the federal government will also see their annual contribution limit climb to $23,500 in 2025, which is an increase from the previous limit of $23,000 in 2024.
In a statement, the Internal Revenue Service (IRS) discussed the new adjustments, notably referring to the new regulations for individuals aged 50 and over.
“The catch-up contribution maximum that normally applies for employees aged 50 and over who join in the majority of 401(k), 403(b), governmental 457 plans, and the Thrift Savings Plan offered by the federal government will continue at $7,500 for the year 2025.
As a result, individuals who are 50 years of age or older and who are participants in the majority of 401(k), 403(b), governmental 457 plans, and the Thrift Savings Plan offered by the federal government are normally permitted to contribute up to $31,000 annually beginning in 2025.
There is one category of accounts that will maintain the current limit, and that is individual retirement account accounts (IRAs), which will continue to permit a contribution of only $7,000 for the year 2025.
As the statement continues to explain, “The catch-up contribution limit for individuals aged 50 and over of the Individual Retirement Account (IRA) was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost-of-living adjustment, but it remains $1,000 for the year 2025.”
Tax Deductions and income thresholds
Contributions to retirement accounts are not the only adjustments that the Internal Revenue Service (IRS) plans to undertake in 2025; it will also boost some of its deductions in order to adjust them to the cost of living adjustment that salaries go through.
To ensure that those who technically earn the same as they did previously due to inflation do not continue to climb tax brackets and are not burdened by more taxes than they should reasonably pay, this factor, in conjunction with a movement in the income tax brackets, will be implemented.
With that being said, the standard deduction will be raised to $15,000 for those who are paying their taxes as singles or as married persons filing separately in the year 2025.
This is a $400 increase from the previous year. The deduction that married couples who file jointly are eligible for will increase to $30,000, which is an increase of $800.
A $600 increase will be made to the deduction for heads of households, bringing the total amount to $22,500.
Individuals will also be affected by the modification of the tax advantages that are being offered. Among the changes that will be included are adjustments to the income criteria for each of the seven federal tax brackets.
The fact that not all income is subject to taxation is something that workers should keep in mind. After deducting the greater of the standard or itemized deductions from your adjusted gross income, you will arrive at your taxable income.
This is the reason why the adjustment of the standard deductions is of such critical importance for taxpayers.
Following the completion of the calculation of the taxable income, it is then subdivided into portions that are subject to taxation at progressively higher rates, based on the federal tax bracket that you are in. The following brackets are:
- For those with incomes of $11,925 or less (or $23,850 or less for married couples filing jointly), the tax rate is 10%.
- For incomes that are greater than $11,925 ($23,850 for married couples filing jointly), the tax rate is12%.
- For incomes that are greater than $48,475 ($96,950 for married couples filing jointly), the rate is 22%.
- For incomes that are greater than $103,350 ($206,700 for married couples filing jointly), the rate is 24%.
- 32% for spouses with salaries that are greater than $197,300 ($394,600 for married couples filing jointly).
- Incomes that are greater than $250,525 ($501,050 for married couples filing jointly) are subject to a 30% tax.
- 37% will be applied to incomes that are greater than $626,350 ($751,600 for married couples filing jointly).
In 2025, this bracket will remain unchanged from the previous year, 2024, and will not undergo any changes.