Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

2024-2025 Tax Updates

2024-2025 Tax Updates: Key Changes, Strategies, and What You Need to Know

As we approach the end of 2024, it’s essential to stay informed about the tax changes that will impact your upcoming filings. The Internal Revenue Service (IRS) has announced several updates for the 2024 tax year, and there are anticipated changes for 2025 that taxpayers should be aware of. This comprehensive guide will walk you through these updates, helping you prepare effectively for the 2024 tax season and plan ahead for 2025.

Tax Year 2024 Updates

Standard Deduction Increases

The standard deduction has been adjusted for inflation, resulting in higher deductions across all filing statuses:

  • Married Couples Filing Jointly: The standard deduction increases to $29,200, up by $1,500 from the previous year.
  • Single Taxpayers and Married Individuals Filing Separately: The deduction rises to $14,600, an increase of $750.
  • Heads of Household: The deduction is now $21,900, up by $1,100.

These increases aim to reduce taxable income, potentially lowering your overall tax liability.

Marginal Tax Rates Adjustments

The IRS has updated the income thresholds for marginal tax rates to account for inflation:

  • 37% Tax Rate: For incomes over $609,350 (single) and $731,200 (married filing jointly).
  • 35% Tax Rate: For incomes over $231,250 (single) and $462,500 (married filing jointly).
  • 32% Tax Rate: For incomes over $182,100 (single) and $364,200 (married filing jointly).
  • 24% Tax Rate: For incomes over $95,375 (single) and $190,750 (married filing jointly).
  • 22% Tax Rate: For incomes over $44,725 (single) and $89,450 (married filing jointly).
  • 12% Tax Rate: For incomes over $11,000 (single) and $22,000 (married filing jointly).
  • 10% Tax Rate: For incomes up to $11,000 (single) and $22,000 (married filing jointly).

These adjustments ensure that taxpayers are not pushed into higher tax brackets solely due to inflation.

Bonus Depreciation

For qualified property placed in service during 2024, the bonus depreciation rate is set at 60%. This allows businesses to deduct a significant portion of the cost of eligible assets in the year they are placed in service, promoting investment in business growth.

Alternative Minimum Tax (AMT) Exemption

The AMT exemption amounts have been increased:

  • Single Filers: The exemption is $85,700, with a phase-out beginning at $609,350.
  • Married Couples Filing Jointly: The exemption is $85,700, with a phase-out starting at $1,218,700.

These adjustments help prevent middle-income taxpayers from being subject to the AMT.

Earned Income Tax Credit (EITC)

The maximum EITC amounts for 2024 are as follows:

  • Three or More Qualifying Children: $7,830
  • Two Qualifying Children: $6,960
  • One Qualifying Child: $4,213
  • No Qualifying Children: $632

The earned income thresholds have also been adjusted to reflect inflation, ensuring that the credit continues to support low- to moderate-income working individuals and families.

Qualified Transportation Fringe Benefit

The monthly limitation for qualified transportation fringe benefits has increased to $315, up by $15 from the previous year. This benefit allows employers to provide tax-free transportation assistance to employees.

Health Flexible Spending Arrangements (FSAs)

For 2024, the employee salary reduction contribution limit for health FSAs is $3,200. Additionally, the maximum carryover amount has increased to $640, allowing employees to roll over unused funds to the next plan year.

Medical Savings Accounts (MSAs)

The parameters for MSAs have been adjusted:

  • Self-Only Coverage:
    • Annual deductible must be between $2,800 and $4,150.
    • Maximum out-of-pocket expenses are $5,550.
  • Family Coverage:
    • Annual deductible ranges from $5,550 to $8,350.
    • Maximum out-of-pocket expenses are $10,200.

These adjustments ensure that MSAs remain a viable option for managing healthcare expenses.

Foreign Earned Income Exclusion

The foreign earned income exclusion has increased to $126,500, up from $120,000. This allows U.S. citizens and resident aliens living abroad to exclude a higher amount of foreign earnings from their taxable income.

Estate and Gift Tax Exclusion

The estate tax exclusion amount has risen to $13,610,000, an increase from $12,920,000. The annual gift tax exclusion has also increased to $18,000, up from $17,000. These changes allow for more wealth to be transferred without incurring federal estate or gift taxes.

Adoption Credit

The maximum adoption credit for 2024 is $16,810, up from $15,950. This credit helps offset the costs associated with adopting a child.

Looking Ahead: Anticipated Tax Changes for 2025

While the IRS has not yet released all details for the 2025 tax year, several provisions are set to change or expire:

Bonus Depreciation

The bonus depreciation rate is scheduled to decrease to 40% for qualified property placed in service in 2025. This gradual reduction is part of the phase-out plan established in prior legislation.

Qualified Business Income Deduction (Section 199A)

The deduction allowing eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income is set to expire after 2025 unless extended by Congress. This deduction has been a significant tax benefit for small business owners and self-employed individuals, so it’s important to stay updated on any legislative changes.

Changes to Itemized Deductions

Several provisions related to itemized deductions are set to expire after 2025:

  • The suspension of the deduction for miscellaneous itemized deductions subject to the 2% floor will end.
  • The $10,000 cap on state and local tax (SALT) deductions is set to expire, potentially allowing taxpayers to deduct larger amounts of these taxes.

These changes could significantly impact taxpayers who itemize, particularly in high-tax states.

Child Tax Credit

The expanded child tax credit, which increased the credit to $2,000 per qualifying child and added a $500 credit for other dependents, is scheduled to revert to pre-2017 levels after 2025. This would reduce the credit amounts and make fewer taxpayers eligible for the full benefit.

Estate and Gift Tax Exemption

The doubled estate and gift tax exemption amount, currently indexed for inflation, is set to revert to pre-TCJA levels after 2025. This means the exemption per individual could drop from its current level (approximately $13.61 million in 2024) to around $5.5 million, impacting estate planning strategies for high-net-worth individuals.

Alternative Minimum Tax (AMT)

The increased AMT exemption amounts and raised phase-out thresholds introduced under the TCJA are set to expire after 2025. Without legislative action, more middle- and upper-income taxpayers could be subject to the AMT starting in 2026.

Ongoing Tax Provisions

While many provisions are set to change, some key tax rules will remain in place:

  • Corporate Tax Rate: The corporate tax rate remains permanently reduced to 21%.
  • Net Operating Losses (NOLs): NOLs from tax years after 2017 can only be carried forward and are limited to offsetting 80% of taxable income in a given year.
  • Interest Deduction Limitation: The deduction for business interest expense is limited to 30% of the business’s adjusted taxable income.
  • Section 179 Expensing: The limit for expensing business assets under Section 179 remains at $1 million, with a phase-out threshold of $2.5 million, indexed for inflation.

Tax Planning Tips for 2024 and Beyond

With these changes in mind, consider the following strategies to maximize your tax benefits and avoid surprises:

  1. Adjust Withholding and Estimated Taxes: If your income or deductions have changed significantly, update your withholding or estimated tax payments to prevent an unexpected tax bill or penalties.
  2. Plan for Depreciation Changes: Businesses should evaluate their capital investment plans to take advantage of the higher bonus depreciation rate in 2024 before it decreases in 2025.
  3. Utilize Tax-Advantaged Accounts: Maximize contributions to retirement accounts (401(k), IRA, SEP IRA), health savings accounts (HSA), and flexible spending accounts (FSA) to reduce taxable income.
  4. Evaluate Estate Plans: High-net-worth individuals should consider leveraging the current estate and gift tax exemption amounts before they revert to lower levels in 2026.
  5. Prepare for the QBI Deduction Sunset: Business owners may need to adjust their tax strategies in anticipation of the potential expiration of the Section 199A deduction after 2025.
  6. The tax landscape for 2024 going into 2025 brings both opportunities and challenges: Stay updated on legislative changes and work with a tax professional to navigate potential impacts. Our team offers personalized advice and strategies to optimize your tax situation.

Conclusion

The tax landscape for 2024 going into 2025 brings both opportunities and challenges. By understanding the updates and planning ahead, you can optimize your tax situation and avoid potential pitfalls. Our team is here to assist you with personalized advice and tax strategies tailored to your needs.

If you have any questions or need help preparing for the upcoming tax season, don’t hesitate to contact us. Let’s work together to ensure a smooth and successful tax filing experience!

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Required Minimum Distributions (RMDs): What Are They and Why Are They Required?

Required Minimum Distributions (RMDs): What Are They and Why Are They Required? As retirement approaches, understanding the rules around Required Minimum Distributions (RMDs) becomes crucial for anyone with a retirement account. RMDs are mandatory withdrawals that...

HRA 105 Reimbursement Plan: A Comprehensive Guide for Businesses

In today's evolving healthcare landscape, businesses of all sizes are searching for cost-effective ways to provide health benefits to their employees. One increasingly popular solution is the HRA 105 Reimbursement Plan. This plan offers flexibility, tax advantages,...

Do I Need to Pay Taxes on Payments Received in Cash?

Receiving payments in cash might seem like a simple and hassle-free way to manage your finances, especially if you're a freelancer, small business owner, or even just doing a few side gigs. However, while cash payments are convenient, they come with responsibilities...

Bonus Depreciation: Maximizing Tax Benefits for Businesses

Bonus depreciation is a powerful tax incentive that allows businesses to accelerate the depreciation of qualified property, thereby reducing taxable income and enhancing cash flow. This article delves into the intricacies of bonus depreciation, its eligibility...

Which Accounting Software to Use – QBD, QBO, Excel, NetSuite, Wave, Xero, etc.

In today's digital age, choosing the right accounting software is crucial for businesses of all sizes. With numerous options available, it can be challenging to determine which software best suits your needs. This article will explore some of the most popular...

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work?

The capital gains exclusion for the sale of a primary residence is a significant tax benefit available to homeowners in the United States. This exclusion allows taxpayers to exclude a substantial portion of the gain realized from the sale of their primary residence...

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work?

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work? The capital gains exclusion for the sale of a primary residence is a significant tax benefit available to homeowners in the United States. This exclusion allows taxpayers to exclude a...

Compensation and K-1 Reporting for Partnership Owners

As a business owner of a partnership, understanding how your compensation and earnings are reported and taxed is crucial for managing your finances and staying compliant with IRS regulations. Unlike S-Corporations (S-Corps), partnerships cannot pay their owners a W-2...

W-2 Salary vs. Distributions vs. K-1 for S-Corp Owners

W-2 Salary vs. Distributions vs. K-1 for S-Corp Owners As an S-Corporation (S-Corp) owner, understanding the distinctions between W-2 wages, distributions, and K-1 profits is essential for managing your tax obligations and business finances. In this article, we will...

Non-Compete Law Changes in 2024: What Employers and Workers Need to Know

Non-compete agreements have long been a standard tool for employers seeking to protect sensitive business information and retain talent, but their future is now uncertain. In 2024, sweeping changes to non-compete agreements are expected, driven by the Federal Trade...

Request an Appointment Today

11 + 3 =

Call us at

Pin It on Pinterest

Share This