Are you familiar with how our federal tax code originated?
In 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Conservatives, hoping to thwart the idea, proposed passing the bill as they believed 75% of the states would not ratify the constitutional amendment, according to the National Archives.
To their surprise, the 16th Amendment was ratified in 1913, granting Congress the authority to impose a federal income tax. Originally, less than 1% of the population paid income taxes, and the tax rate was merely 1% of net income, thanks to generous exemptions and deductions.
Today’s complexity
Things have changed since. They continue to change.
Below, we will touch on the high points. If you have questions, please reach out to us. As always, if you have specific tax questions, feel free to consult with your tax advisor.
1- Tax brackets have changed. The seven tax brackets for 2025 for single, married, head-of-household, and married filing separately. Table 1: 2025 Tax Tables
Generally speaking, the rates are applied to taxable income—income less the standard deduction or itemized deductions, whichever is higher. This does not include tax credits or self-employment tax.
2- For single taxpayers and married individuals filing separately for the tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024, according to the IRS.
For married couples filing jointly, the standard deduction rises to $30,000, up $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for 2024.
For single filers and heads of households age 65 and over, the additional standard deduction will rise from $1,950 in 2024 to $2,000 in 2025.
For 2025, married couples over 65 filing jointly, the additional deduction per qualifying spouse will increase from $1,550 in 2024 to $1,600 in 2025, a $50 increase per qualifying spouse. If both are older than 65, there is a total increase in their standard deduction of $100.
3- For tax year 2025, alternative minimum tax exemption amounts for unmarried individuals is $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350.
For married couples filing jointly, the exemption amount is $137,000 and begins to phase out at $1,252,700.
4- The maximum child tax credit is $2,000 per qualifying child. It is not adjusted for inflation. The refundable portion of the child tax credit is adjusted for inflation and will remain at $1,700 for 2025.
5- The gift and estate exemptionfor individuals in 2025 is $14.0 million, up from $13.6 million in 2024. The annual gift tax exclusion for 2025 is $19,000, up $1,000 in 2024, without using any of the lifetime gift and estate tax exemption.
6- Favorable treatment for long-term capital gains is a cherished tax break for investors. Long-term capital gains, such as the profit on the sale of a stock held for more than one year, are taxed at a more favorable rate than short-term gains. A short-term gain is taxed as if it were ordinary income. Qualified dividends are also taxed at a lower rate.
IRA contributions
The IRA contribution limit for 2024 and 2025 is $7,000 for those under age 50, and $8,000 for those age 50 or older.
Changes may be on the horizon
The TCJA significantly increased the standard deduction, simplifying the filing process, as it eliminated the need for many taxpayers to itemize. But it also scrapped the personal exemption.
Unless extended, please be aware that many provisions of the TCJA will expire at the end of 2025. Republicans generally favor a broad extension of the TCJA. However, it is uncertain how negotiations will eventually play out regarding key provisions. Any changes will be implemented for tax year 2026.
Expected changes if the TCJA is allowed to sunset:
- When the TCJA expires at the end of 2025, marginal tax rates for individuals will revert to pre-TCJA levels, including a maximum rate of 39.6%, up from 37%.
- The standard deduction will return to pre-TCJA levels, with an adjustment for inflation. For single filers, the standard deduction would fall to approximately $8,300 and $16,600 for joint filers.
- The child tax credit will be reduced to $1,000 from $2,000.
The personal exemption will be reinstated and valued at about $5,300, per the Tax Foundation.
- The gift and estate tax exemption will be reduced for individuals to roughly $7.5 million, according to Fidelity.
- The $10,000 cap on itemized state and local taxes (SALT) will be removed.
- The special 20% tax deduction for pass-through businesses will disappear.
We are mindful that the tax code is quite complex. We are happy to answer any questions you may have. Feel free to consult with your tax advisor.
As we bid farewell to 2024, may the New Year bring you excitement, adventure, and fulfillment. May the year create cherished memories and be filled with joy. Happy New Year from all of us!