Every year, middle-class taxpayers hope to keep as much of their hard-earned income as possible, looking to any tax code changes that might affect this, and 2025 is no different.
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Incoming presidents tend to make changes at the beginning of their terms, or when they have the congressional support to do so. While President Joe Biden’s administration did not make sweeping changes to the tax code, many of the tax cuts made in 2017’s Tax Cuts and Jobs Act under President-elect Donald Trump’s first term are set to expire in 2025. What do middle-class people need to know?
Here are some tax code changes to consider to keep your taxes low.
What the Tax Code Incentivizes
The overall tax code is structured in such a way as to incentivize people to invest in four things, according to Arron Bennett, CEO of Bennett Financials. These are business, energy, charities and real estate.
“So it’s probably smart for people that are putting a large amount of money into 401(k)s or people that are making a decent amount of money in their W-2s to invest in those types of strategies,” he said.
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Retirement Contributions Increase
To make one part of that investment strategy easier, the allowance for retirement contributions has gone up to $23,500 for 401(k) plans with a catch-up of $7,500 for people 50 and older and, for people ages 60, 61, 62 and 63, it’s going up to $11,250, Bennett explained.
“So there’s some really cool things that people that are getting on in years can do, and that’s really just maximizing those retirement accounts, which is really what the incentive is right now,” he said.
Standard Deductions Are Going Up
For people who do not itemize their taxes (such as self-employed or freelance workers), they take what’s known as the standard deduction, a set amount you can write off from your income to lower your tax burden. That amount will go up in 2025, so this will impact you when you file in 2026.
“So for single filers we know that it’s going to go up $400 to $15,000, which is great. We also know that married filing jointly, they’re going to get their standard deduction of $30,000, which is an $800 increase,” Bennett said.
Federal Income Bracket Bumps
Every year the IRS adjusts its seven tax brackets and other aspects of the tax code for inflation. What this means is that the amount of income you can make while remaining in the same lower tax bracket will increase slightly, Bennett explained. This means more money in your pocket.
“A lot of those changes could mean a bigger refund for the average American middle class household in 2025 if everything stays the same from 2024, probably about a 3% bigger refund,” according to Kevin Landis a CFP, chartered financial consultant and senior vice president with Wealth Enhancement Group.
Considerations for the Lower- to Medium-Income Middle Class
Since the middle class is not a same-income monolith, but ranges from around $50,000 at the lower end to around $150,000 at the upper end, different wage groups need to do different things.
“So to the lower to medium middle class I would say start maximizing those 401(k)s,” Bennett said. This is especially true where there’s an employer match.
He also encouraged the use of health savings accounts (HSAs) for anyone on the lower to medium end of the middle class.
“HSA plans are one of the most amazing things that you can get. It’s like a triple threat. You don’t get taxed on the money when it goes in. It grows when the money is in there and it’s tax free. And then when the money comes out for proper usage of medical expenses, it’s tax free as well,” he explained.
There is also a small increase in the amount of once-yearly 401(k) to Roth rollovers as well, Landis said, by about $500.
Likely Restoration of Sunsetting Tax Cuts
One of the things Trump promised on the campaign trail was that he would restore the tax cuts made in his 2017 Tax Cuts and Jobs Act (TCJA), which sunset in 2025 (meaning there won’t be any changes until 2026), Bennett said. These include a variety of cuts, changes and deductions for individuals and businesses.
Beyond 2025
The incoming Trump administration, which will have control of both the House and the Senate, has the power to make other tax code changes quickly, Bennett said. One proposed change, he said, is an attempt to simplify the tax code.
“So they’re trying to bring two rates, one at 15% and one at 30%,” he explained. Any changes made in 2025 will likely affect 2026 and beyond, however.
Looking at all of this and 2025 should be a good year for middle-class taxpayers.
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This article originally appeared on GOBankingRates.com: What the Middle Class Needs To Know About Tax Changes in 2025 To Keep Taxes Low
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