Federal Tax Legislation Update: Key Changes

Recent federal tax law updates, driven by economic conditions and policy objectives, will affect a wide array of taxpayers. This article summarizes the substantive changes for the upcoming filing season, covering individuals, families, businesses, and retirement savings.

Key Tax Changes for Individuals and Families

The federal government makes annual adjustments to tax provisions to account for inflation. These changes ensure that taxpayers are not pushed into higher tax brackets. For the 2025 tax year, the seven federal income tax rates—10%, 12%, 22%, 24%, 32%, 35%, and 37%—remain the same, but the income thresholds for each bracket have been raised.

For single filers in 2025, the 24% bracket now applies to taxable income over $103,350, and the 32% bracket begins at $197,300. Married couples filing jointly will see the 24% bracket apply to income over $206,700 and the 32% bracket start at $394,600. The top marginal rate of 37% will apply to single filers with taxable income exceeding $626,350 and married couples with income over $751,600.

The standard deduction, which reduces the amount of income on which you are taxed, has also increased for 2025. The standard deduction for single taxpayers and those married filing separately has risen to $15,000. For married couples filing jointly, the deduction increases to $30,000, and for heads of households, it is now $22,500.

Taxpayers who are age 65 or older or are blind are entitled to an additional standard deduction amount. For 2025, this additional amount is $1,600 for married individuals and $2,000 for single filers. The personal exemption remains at zero.

Tax credits directly reduce the amount of tax owed. The annual gift tax exclusion has increased for 2025, allowing individuals to give up to $19,000 to any other person without having to file a gift tax return. For gifts to a spouse who is not a U.S. citizen, the exclusion has risen to $190,000. The lifetime gift and estate tax exemption has also been adjusted for inflation, increasing to $13.99 million per individual for those who pass away in 2025.

Updates to Retirement Savings Rules

Recent legislation has introduced several changes to retirement savings plans. For 2025, the maximum amount an employee can contribute to a 401(k), 403(b), or most 457 plans has increased to $23,500.

Employees aged 50 and over can contribute an additional $7,500 to their 401(k) or 403(b) plan in 2025, bringing their total possible contribution to $31,000. The contribution limit for Individual Retirement Arrangements (IRAs) is $7,000 for 2025, with the catch-up contribution for those age 50 and over at $1,000.

One of the most recent changes concerns Required Minimum Distributions (RMDs). The age at which account holders must begin taking RMDs from their retirement accounts has been raised. The SECURE 2.0 Act implemented these adjustments, giving savers more flexibility.

The legislation also introduced new provisions, including one that allows for penalty-free emergency withdrawals from retirement accounts for certain unforeseeable or immediate financial needs. Another development is the creation of “starter” 401(k) plans for small businesses. New rules now permit employers to make matching contributions to an employee’s retirement plan as Roth contributions. Unlike traditional pre-tax contributions, Roth contributions are made with after-tax dollars, meaning qualified distributions in retirement are tax-free.

Significant Business Tax Modifications

Businesses are also navigating a series of tax changes. One of the most notable adjustments is the scheduled phase-down of bonus depreciation. Under current law, the first-year deduction is scheduled to decrease from 60% for property placed in service in 2024 to 40% in 2025. However, there is a significant legislative push to restore 100% bonus depreciation.

In contrast to the phasing out of bonus depreciation, the Section 179 expensing election allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service. For 2025, the maximum Section 179 expense deduction is set at $1.25 million, with a phase-out threshold of $3.13 million.

The treatment of research and experimental (R&E) expenditures has also changed. A change that took effect in 2022 requires companies to amortize these costs over five years for domestic research, rather than expensing them immediately. There has been bipartisan support for repealing this provision, and proposed legislation seeks to restore immediate expensing.

For businesses that operate as pass-through entities, such as S corporations and partnerships, the Qualified Business Income (QBI) deduction allows eligible taxpayers to deduct up to 20% of their qualified business income. This deduction is currently set to expire after 2025. However, proposed legislation passed by the House seeks to make the deduction permanent.

Energy-Related Tax Credit Adjustments

Federal tax policy has increasingly been used to incentivize the adoption of clean energy technologies by both individuals and businesses. The Clean Vehicle Credit provides a tax credit for the purchase of new and used electric vehicles (EVs), with limitations based on the manufacturer’s suggested retail price (MSRP), the taxpayer’s modified adjusted gross income, and stringent requirements for battery component and critical mineral sourcing.

The Residential Clean Energy Credit allows for a credit of 30% of the cost of new, qualified clean energy property for the home. This includes equipment such as solar panels, solar water heaters, wind turbines, and geothermal heat pumps. There are no credit limits except for fuel cell property.

The Energy Efficient Home Improvement Credit is equal to 30% of the costs of certain qualified energy-efficient home improvements, such as new exterior doors, windows, and insulation. The credit has an annual limit of $1,200, though there are specific limits for different types of property. For example, the credit for new exterior doors is limited to $250 per door, up to a total of $500.

Businesses also have access to a range of energy-related tax credits, including credits for the purchase of commercial clean vehicles and for the installation of alternative fuel vehicle refueling property. While the Inflation Reduction Act of 2022 expanded many of these provisions, some credits could be modified or eliminated by future legislation.

IRS Operations and Taxpayer Interactions

The Internal Revenue Service (IRS) has been undergoing a period of significant transformation, driven by a substantial increase in funding. The funding is intended to modernize the agency’s technology, improve taxpayer services, and increase enforcement activities. A primary goal of the enhanced funding is to close the “tax gap,” which is the difference between taxes owed and taxes paid on time.

A focus of the IRS’s new enforcement efforts is on high-income earners, large corporations, and complex partnerships. The agency has stated its intention to use the additional funding to hire more revenue agents with specialized expertise to handle these complex audits.

Alongside its enforcement initiatives, the IRS is also working to improve the taxpayer experience. One of the most notable developments is the decision to make IRS Direct File a permanent, free option for all Americans to file their federal tax returns directly with the agency. Starting with the 2025 tax season, the IRS plans to expand the program to be available in more states and to cover more tax situations.

The agency is also expanding its online services to provide taxpayers with more self-service options. Taxpayers can now create an online account to view their tax records, make payments, and manage their communications with the IRS.