Every year, the IRS adjusts the federal tax brackets to account for inflation, and 2025 is no different. While the tax rates remain unchanged, the income brackets have been updated to reflect economic shifts. These changes present unique planning opportunities, particularly for retirees who have more control over their taxable income. Let’s discuss what these adjustments mean and how you can use them to your advantage.
What Changes in 2025?
The tax rates—10%, 12%, 22%, 24%, and so on—stay the same. However, the income thresholds for these brackets have increased. For example, if your income remains steady while the brackets rise, you might end up paying slightly less in taxes.
The standard deduction has also been adjusted:
- Married filing jointly (65+): $33,200
- Single filers (65+): $17,000
These deductions reduce your taxable income, offering retirees significant tax savings without the need for itemizing.
Why This Matters for Retirees
Taxes can be one of the most significant expenses in retirement. With proper planning, you can minimize your tax burden by strategically managing withdrawals, conversions, and capital gains.
Example: Leveraging the 12% Tax Bracket
Imagine a couple earning $80,000 annually. After taking the standard deduction, their taxable income is reduced to $50,000. This leaves room to withdraw an additional $46,000 from their IRA—or perform a Roth conversion—while staying within the 12% bracket. This strategy allows them to “fill up” a lower bracket at a favorable tax rate.
Roth Conversions and Tax Efficiency
Many retirees aim to convert IRA funds to Roth IRAs up to the top of the 24% bracket. For 2025, that means:
- Married filing jointly: $394,000
- Single: $197,000
While these figures represent your marginal rate, it’s essential to remember your effective tax rate—the average rate you pay across all income levels—is significantly lower, often around 20%.
Capital Gains: Common Misunderstandings
Capital gains taxes are often misunderstood. For instance, if your total income (including capital gains) is under $96,000 for a married couple, your capital gains tax rate could be 0%. However, it’s crucial to consider your total income, not just the capital gains amount, when determining your bracket.
Trusts and Estates: Beware of High Tax Rates
Tax brackets for trusts and estates climb quickly. Income above $15,500 is taxed at 37%. This is why we often discourage naming a trust as the beneficiary of an IRA unless it’s properly structured. Poor planning could result in a significant portion of your wealth going to taxes.
Smart Tax Planning Strategies
- Maximize Bracket Thresholds: Plan withdrawals and conversions to take full advantage of lower tax brackets.
- Leverage Capital Gains Opportunities: Understand how your income affects your capital gains rate.
- Coordinate Trust and Estate Planning: Avoid unnecessary tax burdens by structuring trusts carefully.
Planning for 2025 and Beyond
Tax planning isn’t just about reducing your tax bill this year—it’s about creating a long-term strategy that aligns with your retirement goals. By understanding how tax brackets, standard deductions, and capital gains interact, you can make informed decisions that preserve more of your wealth.
