Market Update – December 15th 2024

Standard Deduction Increasing for 2025 and Tax Brackets Adjusting

Your standard deduction in 2025 will be higher than it was in 2024. Your standard deduction is the amount of income the federal government lets you keep 100 percent of. It increases by $400, from $14,600 to $15,000. For heads of household, it increases by $600, from $21,900 to $22,500. For married people filing jointly and surviving spouses, it increases by $800, from $29,200 to $30,000. If you’re 65 or older, your additional standard deduction increases by $50 from $1,550 to $1,600 per qualifying spouse if you’re married and from $1,950 to $2,000 if you file as single or head of household. Tax Brackets are also adjusting. See below.

2024 tax brackets (for taxes due April 2025 or October 2025 with an extension)

2025 tax brackets (for taxes due April 2026 or October 2026 with an extension)

Donald Trump is expected to make tax changes a priority. His efforts may include extending or making permanent the provisions of the 2017 Tax Cuts and Jobs Act set to expire on December 31, 2025.  Without action on the tax code, brackets will revert back to 2017 levels, adjusted for inflation.

The original 2017 Trump tax cut also doubled the standard deduction and the lifetime estate tax exclusion, lowered tax rates, doubled the child tax credit, and created a 20 percent qualified business income deduction for sole proprietorships, partnerships, S corporations, and some trusts and estates. So inaction to extend could have a large impact on 2026.

Long term Capital Gains Income Thresholds improving

For 2025  the long-term capital gains tax rates remain at 0%, 15%, and 20%, but the income thresholds have increased slightly making taking capital gains in 2025 better than 2024 for many. Remember that short-term capital gains (assets held for one year or less) are taxed at ordinary income tax rates, different from those for long-term capital gains.  The 2025 capital gains tax rates are:

0% Rate:

• Single filers: Up to $48,350
• Married filing jointly: Up to $96,700
• Head of household: Up to $64,750

15% Rate:

• Single filers: $48,351 to $533,400
• Married filing jointly: $96,701 to $600,050
• Head of household: $64,751 to $566,700

20% Rate:

• Single filers: Over $533,400
• Married filing jointly: Over $600,050
• Head of household: Over $566,700

Catch up Contributions on 401k Increase for Some

If you have access to an employer-sponsored retirement accounts, you’ll be able to contribute as much as $23,500 in 2025 if you are under age 50.  That is an increase of $500 from 2024.

If you get paid every two weeks and want to max out your contributions, you’ll have an additional $19.23 withheld from each paycheck, for a total of $903.85 per pay period. Workplace plans also let you make catch-up contributions of up to $7,500 in 2025 if you’re 50 or older, or an extra $288.46 per paycheck. This limit is unchanged from 2024. What is new for 2025 is that if you’re 60, 61, 62, or 63, you’ll be able to make a catch-up contribution of up to $11,250 under a SECURE 2.0 Act provision that will kick in. So if you are between 60-63 you can contribute $34,750 into your 401k, that is $1,336.54 per pay period if you are getting paid every 2 weeks.

Social Security Fairness Act

Not sure that it is fair but if you throw fairness in the title people will think it is.  Probably not fair at all younger people because it will further deplete the Social Security Trust fund. But, I am including it here even though it hasn’t yet passed.  That’s because momentum is building around the legislation that could mean higher Social Security benefits for some of you. That includes those who also collect pensions from state and federal jobs that aren’t covered by Social Security, including teachers, police officers and some U.S. postal workers. The bill would also end a second provision that reduces Social Security benefits for those workers’ surviving spouses and family members. Decades in the making, the bill would repeal two federal policies — the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) — that broadly reduce payments to nearly 3 million retirees.  The WEP impacts about 2 million Social Security beneficiaries and the GPO nearly 800,000 retirees.

Changes for Federal Employees

As most of you have already seen during open enrollment the most significant change to your benefits is the cost of your health insurance. The overall average increase in rates for FEHB for 2025 is 11.2%. However, there is good news for those of you retiring at year end. Your pension may get finalized a little quicker than normal. That is because The OPM retirement backlog has dropped to levels not seen since 2016. As of the end of November 2024, the total outstanding retirement claims at the Office of Personnel Management is 13,844. The last time it was at or below that level was June 2016 when it was 13,529. OPM received 6,808 new retirement claims in November and processed 7,872. It took an average of 55 days to process claims. Figure on it taking longer than 55 days but being faster than most years. The reason it will take longer than the current pace is  because most federal employees retire at the end of a calendar year. The impact on the processing doesn’t hit until January. The peak time at OPM for processing retirement claims is January through March, and January is typically the month with the largest spike in the retirement backlog based on past data. For example, the OPM retirement backlog grew by 46% last January.