During the closing weeks of each calendar year, our Federal Government trickles out tax changes that will affect savers and investors in the coming New Year. The process has started for 2025, and we are bringing you what we know so far, with some analysis and comments included.
Foundational to annual changes is the inflation incurred over the past Government fiscal year, which ends on September 30. At that point in time, price levels are compared to the same date last year, and the overall change is deemed the official annual inflation rate. Logic would dictate that tax-related items would be applied consistently, but (as I have railed against in the past) that would be too easy for America’s massive bureaucracy. Therefore, we must break down actual changes by category to judge the effects on tax bills.
First, we stipulate that the inflation numbers provided to us are clearly designed to understate the actual level of price increases. Seldom in my decades on the planet has this been more evident than over the past 4 years.
Acknowledging the true rate of inflation would cause the massive annual budget deficit to (further) explode. We are powerless to change the process, so we simply report and comment. Read it and weep, as they say.
Initially, we are treated to the “official rate of inflation,” which is +2.4% for the year ended 09/30/2024. This is down slightly from the prior year, which was stated as +2.5%. For the record, my experience during those 24 months is considerably higher than the collective 5%. You probably agree.
First to be announced was the Social Security Benefit COLA (Cost-of-Living Adjustment), which for 2025 will be 2.5%. Medicare recipients who also collect Social Security monthly benefits will have to wait longer to discover their monthly Medicare increases. My guess is that the Medicare increase will be higher than the 2.5% Social Security COLA, rendering 70+ Million Americans worse off than they are today. We will report as soon as increases are announced.
Income Tax Brackets were revised for 2025, with the brackets broadened about 2.8%, a little better than the inflation rate. Score one for taxpayers.
Retirement Plan contributors were losers from data released so far. IRA contributions were not increased, and Employer-sponsored Plan participants received a paltry 2.17% contribution increase. Deductible limits for Traditional IRAs, and income limitations for Roth IRA contributions, were raised in a mixture of percentages that makes no sense. Some are a little higher, and some a little lower, than the stated inflation rate.
For Tax Filers, the Standard Deduction increased by 2.74%, but the FICA and Medicare taxation limits were increased sharply, all in excess of 4%, a mixed bag.
All in all, early data is a hodgepodge. We’ll keep you up-to-date.
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