Editor’s Note: Sign up for Debbie Taylor’s four-day virtual workshop “Savvy Tax Planning School for Advisors,” being held on January 23, 24, 30 and 31. Learn more and register here.
The landscape of tax planning is shifting significantly for 2025. With a Republican sweep in the 2024 elections and new tax legislation on the horizon, financial advisors must navigate both current inflation adjustments and potential future changes.
While this year’s adjustments are not the historic increases seen in recent years (compared to 7% in 2023 and 5.4% in 2024), they still represent meaningful changes that create both opportunities and challenges for client tax planning.
Below we highlight the six key areas advisors must consider to effectively guide their clients through these important changes.
1. Standard deduction increase to $30,000 for Married Filing Jointly
The standard deduction increases to $30,000 for married filing jointly (up $800 from 2024), $15,000 for single and married filing separately (up $400), and $22,500 for head of household filers. Beyond these base amounts, clients who are blind or over 65 receive an additional deduction of $1,600 each, while unmarried taxpayers get $2,000. For dependent filers, the standard deduction cannot exceed the greater of $1,350 or earned income plus $450. These changes require a fresh analysis of itemization strategies, particularly for clients straddling the threshold.
Pro tip: there are so many ways to think of how to benefit from the increase in the standard deduction since the 2017 passing of the Tax Cuts and Jobs Act (TCJA). Implement a rolling three-year deduction analysis to identify optimal years for bunching medical expenses, charitable contributions, and state tax payments while considering AMT implications. One way to think about it is to review charitable giving strategies for clients near the standard deduction threshold—bunching donations in alternate years might maximize tax benefits under the new limits. And along these lines, think about punching other deductions, like elective medical and even certain tax payments (of course, subject to the $10,000 SALT limitation).
2. Tax bracket bumps
The IRS has adjusted more than 60 tax provisions for inflation to prevent “bracket creep”—a phenomenon where inflation pushes taxpayers into higher brackets without real income increases, representing an approximate 2.8% increase over last year. This means that a couple making up to $394,600 will be in the 24% tax bracket, they will be in the 32% bracket to $501,050, 35% to $751,600, and 37% above that.
Pro tip: Since TCJA, taxpayers have a very wide 22/24% tax bracket, allowing for many to benefit from the new tax law. With the highest bracket at 37%, now is the time to create a multi-year tax projection model that incorporates these new brackets to identify optimal years for Roth conversions, capital gains harvesting, or income acceleration/deferral strategies.
3. Capital gains are preferenced
The 2025 tax landscape presents planning opportunities for capital gains (and capital loss) management. For joint returns and surviving spouses, the 15% rate threshold begins at $96,700, while single filers hit this rate at $48,350. The 20% rate becomes applicable at significantly higher thresholds: $600,050 for joint filers, $566,700 for heads of household, and $533,400 for single filers. Special considerations apply for art, collectibles, and section 1250 gains related to depreciation. Estate and trust tax brackets for capital gains are particularly compressed, with the 15% rate beginning at just $3,250.
Pro tip: Leverage the software to coordinate capital gains with ordinary income to maximize tax efficiency. Also consider creating a capital gains harvesting schedule that coordinates with charitable giving strategies—utilizing direct gifting of appreciated securities for clients in the higher brackets while harvesting gains for those in the 0% bracket.
4. Estate and gift tax planning
The lifetime exclusion has increased substantially for 2025. The estate, gift, and generation-skipping transfer (GST) exclusion increases to $13,990,000—a $380,000 increase from 2024’s $13,610,000. The annual gift tax exclusion rises to $19,000 per recipient. The IRS’s confirmation that there will be no “clawback” if TCJA sunsets creates a crucial planning window, particularly with the remote possibility that TCJA is sunsetting.
Pro tip: Create a systematic review process to identify clients who should accelerate gifting strategies before potential legislative changes, particularly focusing on those with estates of couples between $10 million and $14 million.
5. Business income considerations
The Qualified Business Income (QBI) deduction thresholds see significant adjustments for 2025. The phase-out for specified service businesses begins at $394,600 for joint filers (up from $383,900) and $197,300 for single filers (up from $191,950). This 20% deduction against qualified business income for pass-through entities and Schedule C filers continues to provide substantial tax benefits, though strategic planning is required to maximize its impact. The increased thresholds create new opportunities for service business owners who were previously limited by the phase-outs.
Pro tip: Implement quarterly business income projections to manage taxable income levels relative to QBI thresholds, considering strategies such as retirement plan contributions, asset purchases, and income timing to optimize the deduction.
6. Net Investment Income Tax planning and other thresholds that remain unchanged
The 3.8% NIIT thresholds remain static at $200,000 for single filers and $250,000 for joint filers. The tax applies to the lesser of net investment income or modified adjusted gross income (MAGI) over these thresholds. Investment income categories include taxable interest, ordinary dividends, capital gains, rental and royalty income, non-qualified annuities and passive business income. The unchanging thresholds amid rising portfolio levels mean more clients may face exposure, requiring additional thought to tax-aware investment strategies.
Other areas that have NOT been adjusted for inflation include the $10,000 SALT limitation ($5,000 for Married Filing Separately), $500,000 capital gains exclusion for home sales by couples and Social Security Provisional Income thresholds. In addition, the capital loss offset of $3,000 hasn’t been adjusted for inflation in decades.
Pro tip: For those at risk of the NIIT, consider implementing a tax-aware investment approach that strategically places tax-efficient investments in taxable accounts while positioning income-generating investments in tax-advantaged accounts to minimize NIIT exposure.
Conclusion
Taxes affect everything about your clients’ wealth. Although annual inflation adjustments from the IRS are not necessarily a huge opportunity for celebration, there are aspects of the inflation adjustments that bear consideration. Your expertise in navigating these adjustments and understanding how taxes fit in for your clients will not only protect your clients’ wealth but also differentiate your practice in an evolving financial landscape.