WSJ Your Money Briefing - The IRS Has Released Its New Tax Brackets for 2025. Where Do You Fall?

Episode Date: October 29, 2024

The brackets that determine how much you pay in taxes are moving up by their smallest amount in a few years. WSJ reporter Ashlea Ebeling tells Ariana Aspuru what this change means and how it could impact your 2025 return.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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This is not a recommendation or offer to buy, sell, or retain any specific investment or service. Here's your money briefing for Tuesday, October 29th. I'm Arianna Spuru for The Wall Street Journal, filling in for J.R. Whelan. We're still months away from tax season, but the IRS has released the new tax brackets and standard deductions for 2025. And it's the smallest increase in a few years.

The brackets going up a little means it takes more income to reach each higher tax bracket. So someone who makes about the same would owe just a little bit less in taxes. For example, someone earning $120,000 and then they take the standard deduction, they would owe about $400 less. Wall Street Journal reporter Ashley Ebling joins me to break down some of the key changes after the break. The Goldman Sachs Podcast featuring exchanges on rates, inflation, and U.S. recession risk. Exchanges on the market impact of AI. For the sharpest analysis on forces driving

the markets and the economy count on exchanges between the leading minds at Goldman Sachs. New episodes every week. Listen now. The IRS has announced its new 2025 tax brackets. WSJ personal finance reporter, Ashley Ebling joins me. Ashley, can you give me a quick 101 on how brackets work and why they're so important? It's important to know where you fall because knowing your tax bracket can help you estimate how much you'll owe in taxes. And maybe you need to pay inestimated tax payments if you're a freelancer or consultant, any kind of gig income other than your W-2 job.

There's seven different tax brackets that each have accompanying tax rates, and they range from 10% to 37% depending on your taxable income. There are different sets of brackets depending on your filing status, whether you're filing your tax return as an individual, head of household, or married, filing jointly or separately. People throw around the word tax brackets a lot, especially as April comes around. How can people visualize these, understand how important they are?

So one way is you could think of it like a ladder, because it's a progressive tax system. Some of your incomes tax at the lowest rung at 10%, some tax at the next rung at 12%, and so on, up to the 37% for the highest income people. The higher your income, the higher you move up the ladder basically, and you keep paying at these progressively higher rates

on that next slice of income. Onto the 2025 brackets. What are the biggest changes? So the IRS announces these inflation adjustments every year to the brackets and the income ranges that make up the tax brackets. They make the announcement in the fall for the next year. This year's increase of about 2.8 percent is the slowest increase since 2021. And is that keeping up with inflation? It slightly outpaces the current inflation rate because inflation has been cooling. Just so we can clarify the timeline a bit here,

these numbers are gonna impact all the money you make next year. Right. The tax season we're approaching that covers 2024 tax year so these new numbers are for 2025. So what does this mean for someone who is roughly gonna make like the same amount that they made this year that they're going to make the same next year? The brackets going up a little means it takes more income to reach each higher tax bracket. So someone who makes about the same would owe just a little bit less in taxes. For example, someone earning $120,000 and then they take the standard deduction, they would owe about $400 less.

What about people who are going gonna make slightly more next year? Once your income goes up, the savings is a little less, but the IRS is lifting all boats. You're always better off because more income's being taxed in the lower brackets at a lower rate. So when someone looks at these brackets and they see, okay, I land in the, let's say, 24% bracket, what does that mean?

So that's important to note. That doesn't mean they're paying 24% on all their taxable income. That could just be the top sliver. For 2025, for a single person, it's above about $103,000. That's at that 24%. The first sliver of their income up to $12,000 is just taxed at 10%, then the next sliver at 12%, then 22%. Going back to that hypothetical $120,000 salary person, their effective tax rate would be more like 15%. How are the rules about standard deductions changing?

That's rising to $15,000 for individuals, and that's up from $14,600 this year. For married couples, it's double. It's $30,000 up from $14,600 this year. For married couples, it's double. It's $30,000, up from $29,200. That's important because you're either taking the standard deduction or you're itemizing deductions. And itemized deductions are things like charitable donations and medical expenses. So for the vast majority of people,

that standard deduction is going to give them a better tax situation. What are some other changes that filers should be aware of? For wealthy Americans, the estate and gift tax rules also are adjusted for inflation. The federal estate tax exclusion amount, that's how much an individual can shelter from estate taxes. That's gone up to $13.99 million for deaths in 2025. Then there's a separate limit on tax-free gifts that goes up to $19,000 for 2025, up from $18,000 this year. Income thresholds for paying capital gains tax are also adjusted for inflation. Taxpayers, for example, could sell appreciated stock and snag

a 0% capital gains tax rate for single filers with income up to $48,350. Joint filers with incomes approaching $100,000 can actually sell appreciated stock at that 0% rate. For anyone really paying attention to tax filings like way ahead of time, how do these rules impact what they should prepare? For planning purposes, you can look and compare 2024 and 2025, and that might impact some decisions on things like how much you're putting into a retirement account, whether you're doing a Roth conversion.

The 2017 Tax Cuts and Job Act expires at the end of next year. If those codes aren't extended, how would this impact tax planning going forward? So that's the big question. All bets are off on what's going to happen with these Trump tax cuts from 2017. Almost all of the individual tax provisions expire at the end of 2025, so Congress has to do something or everything reverts back to the way it was. That reverting back would mean the standard deduction dropping back in half, the state tax exemption dropping back in half. On the rates, the top ordinary rate is now 37 percent. That would go back to 39.6 percent and kick in at a lower level of income. So wealthy Americans are making fail-safe estate plans and they're considering some

income tax moves basically to hedge their bets on all this. That's WSJ reporter Ashley Ebling. And that's it for your Money Briefing. This episode is produced by Zoe Kolkin, with supervising producer Melanie Roy. I'm Marianna Aspuru for The Wall Street Journal. Thanks for listening. With Ecolab Science Certified, we take cleaning off your plate so you can focus on what's most important to your restaurant, your guests, and having them switch from giving your restaurant a go to making it a go-to spot.

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