As a freelancer, staying on top of tax changes is crucial for maintaining the financial health of your business and keeping in compliance with IRS tax law. Now that 2025 is on the horizon, there are many important changes to consider that could impact your tax bill. Staying informed and working on your tax plan with a professional are the best ways to avoid surprises come filing season next year.
Here’s a comprehensive look at the major tax changes and how they might affect you.
1. Standard Deduction Increases
The standard deduction for 2025 has increased, providing a bit more relief for those who don’t itemize deductions (Most taxpayers do not need to itemize unless there are extraordinary expenses related to a business or healthcare costs.)
For single filers, the standard deduction rises to $15,000, up by $400 from 2024.
For married couples filing jointly, it’s now $30,000, an $800 increase.
Heads of households will see their standard deduction rise to $22,500, up by $600.
These increases can help reduce your taxable income, potentially lowering your overall tax burden.
2. Updated Tax Brackets
The IRS has adjusted the income tax brackets for 2025. While the top tax rate remains at 37% for individual single taxpayers earning more than $626,350, other brackets have shifted slightly. Here is a breakdown of the new brackets:
- 35% for incomes over $250,525 (married couples filing jointly: $501,050)
- 32% for incomes over $197,300 (married couples filing jointly: $394,600)
- 24% for incomes over $103,350 (married couples filing jointly: $206,700)
- 22% for incomes over $48,475 (married couples filing jointly: $96,950)
- 12% for incomes over $11,925 (married couples filing jointly: $23,850)
- 10% for incomes $11,925 or less (married couples filing jointly: $23,850 or less)
3. Alternative Minimum Tax (AMT) Exemption Increases
The AMT exemption amounts have increased for 2025. As a brief reminder, this tax applies to high-income earners and runs parallel to the regular tax system.
Incomes above the annual AMT exemption amounts typically trigger the alternative minimum tax to be applied. Certain types of income and tax deductions that you may exclude or deduct when figuring your normal taxes may need to be added back into your taxable income under AMT rules. The exemption amounts are as follows:
- For unmarried individuals, the exemption amount climbs to $88,100, up from $85,700 in 2024.
- For married couples filing jointly, the exemption amount is now $137,000, up from $133,300.
This increase provides a larger cushion before the AMT applies, potentially reducing additional tax burdens for those subject to it.
4. Significant Changes to Retirement Contribution Allowances
The Internal Revenue Service (IRS) has recently announced changes to the 401(k) contribution limits for 2025, which could significantly impact self-employed business owners. These include:
Increased contribution limits
Starting in 2025, the annual contribution limit for 401(k) plans has been raised to $23,500, up from $23,000 in 2024. This increase allows you to save more for retirement, providing a greater opportunity to build your nest egg.
However, unless you have employees, you cannot contribute to a regular 401(k). Also, you can’t contribute to a solo 401(k) if you have employees. If you are married, you can hire your spouse so they can also contribute to the plan.
Your spouse can contribute up to the standard employee 401(k) contribution limit, plus you can add in the employer contributions for up to a total of $69,000 in 2024 ($70,000 in 2025), plus a catch-up contribution, if eligible. This potentially doubles what you can save as a couple this is all due to Secure 2.0 Act changes.
As a sole freelancer business owner, you have other options including the Solo 401(k) and SEP IRAs. Here are the rules for those options:
For 2024, the maximum contribution was $69,000 plus a $7,500 catch-up contribution, or 100% of earned income, whichever is less. In 2025, the limit rises to $70,000. The catch-up contribution remains the same for 2025, but those ages 60 to 63 are eligible for a larger contribution of up to $11,250.
If you contribute to a SEP IRA, there is a special rule for sole proprietors and single-member LLCs: You can contribute 25% of net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself. The limit on compensation that can be used to factor your contribution is $345,000 in 2024 and $350,000 in 2025.
This plan works just like a standard, employer-offered 401(k): You make contributions pre-tax, and distributions after age 59 ½ are taxed.
The annual contribution limit for traditional IRAs is the same for 2025 as it was in 2024 at $7,000, with the catch-up contribution limit for those aged 50 and older remaining at $1,000.
The increased contribution limits and the new super catch-up provision offer you more opportunities to save for retirement. As a self-employed person, it is critical that you take full advantage of these opportunities to secure your financial future.
5. The Earned Income Tax Credit (EITC) Adjustment is Larger.
The maximum EITC amount for families with three or more qualifying children has risen to $8,046 for 2025, up from $7,830 in 2024.
This credit helps low- to middle-income individuals and families reduce their tax liability and potentially receive a refund. The income thresholds for qualifying have also increased, providing more families with access to this valuable credit.
6. The Qualified Transportation Fringe Benefit and Parking Limit Increase
The monthly limit for the qualified transportation fringe benefit and qualified parking has increased to $325, up from $315 in 2024.
If you are an employer, this means you may be able to offer slightly higher pre-tax benefits for commuting expenses, which can be advantageous if you have any team members who use public transportation or need parking.
7. Allowable Contributions to Health Flexible Spending Accounts (FSAs) Increase
Contributions to health FSAs can now reach up to $3,300 for 2025, with a carryover limit of $660. This increase allows freelancers to set aside more pre-tax dollars for health expenses, effectively lowering their taxable income.
8. The Adoption Credit Increases
The maximum adoption credit for 2025 has increased to $17,280 for those who adopt a child with special needs. This credit helps offset the costs associated with adoption, providing financial relief for families.
9. No Changes to Personal Exemption, Itemized Deduction, and Lifetime Learning Credit Rules
For tax year 2025, there are no changes to the rules regarding personal exemptions, itemized deductions, and the lifetime learning credit. This means there is still no limit on the number of itemized deductions you can claim if they are greater than the standard deduction mentioned above.
10. Potential Expiration of Key Federal Tax Provisions
It’s important to note that many key federal tax provisions from the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. This includes the higher base standard deduction and lower tax rates. Make sure you stay informed about potential legislative changes that could impact your tax situation in the future.
Proactive Tax Planning is the Best Strategy
The tax changes for 2025 bring both opportunities and challenges for freelancers. As always, it is highly advisable to check in with a tax professional for insights and recommendations based on your unique situation. The best time to make year-end tax moves for the 2024 filing season and determine if changes are warranted for 2025 is now.
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