Monitoring the changes in the Internal Revenue Service (IRS) and Social Security Administration (SSA) guidelines is crucial for successful 2025 paycheck planning.
Understanding the annual tax updates can help you take advantage of the benefits while avoiding the pitfalls. Here are some benefits and pitfalls to consider in this year’s paycheck planning.
Defined Contribution Plan Limits
The contribution limit for employee salary deferrals has increased from $23,000 in 2024 to $23,500 in 2025, allowing workers to contribute an additional $500 toward their 401(k), 403(b), Thrift Savings Plans for federal employees, and most 457 plans.
The 401(k) catch-up contribution limit for workers aged 50 and older remains at $7,500. For workers aged 60 to 63, the 2025 catch-up contribution limit will increase to $11,250, bringing the 401(k) deferral limit to $34,750.
The limitation for defined contribution plans for 2025 increases from $69,000 in 2024 to $70,000 in 2025, marking a $1,000 increase.
Individual Retirement Account (IRA) Limits
For 2025, the IRA contribution limit remains unchanged from 2024 at $7,000 for individuals below 50. The catch-up contribution will stay at $1,000, bringing the IRA contribution limit for people aged 50 and above to $8,000.
Defined Benefit Plan Limits
Defined benefit plans are a form of employer-sponsored retirement plan offering a specific monthly benefit to employees at retirement within certain limits. In 2025, the limitation on the annual benefit provided under a defined benefit plan increased from $275,000 in 2024 to $280,000.
Social Security Benefits
For 2025, the Social Security and Supplemental Security Income (SSI) benefits will increase by 2.5 percent. The earnings limit for workers below the full retirement age will increase to $23,400, with a deduction of $1 for every $2 of benefits earned above the limit.
For workers reaching their full retirement age in 2025, their earnings limit will increase to $62,160, with a deduction of $1 for every $3 earned over the limit.
Social Security Tax
The maximum earnings taxable under the Social Security Tax in 2025 will be $176,100, up from $168,600 in 2024. Any earnings above this maximum amount will not be subject to additional Social Security tax.
Medicare
The new drug law, the Inflation Reduction Act, will allow people with Medicare to benefit from a redesigned prescription drug program that lowers prescription drug costs starting in 2025.
Under the new act, the annual out-of-pocket costs for people with Medicare Part D will be $2,000, a significant reduction from the previous $8,000 cap.
Standard Deductions
For 2025, the standard deduction for individual filers and married people filing separately will increase from $14,600 in 2024 to $15,000. The standard deduction for heads of household will rise to $22,500 from $21,900, while the deduction for married people filing jointly and surviving spouses will increase from $29,200 to $30,000.
Flexible Spending Accounts
The amount an individual can contribute to their flexible spending accounts has increased by $100, from $3,200 in 2024 to $3,300 in 2025. Contributions to the FSA are not subject to Medicare, federal income, or Social Security tax.
Additionally, any unused funds in your FSA can be carried into 2026 up to a maximum of $660. This limit is a $20 increase from the 2024 benefit period, provided you re-enroll.
Adoption Credits
In 2025, adoptive parents can claim a credit against their federal taxes for up to $17,280 for each adopted child, an increase from the $16,810 allowed in 2024.
Eligibility criteria for the credit include the expenses that must be qualified adoption expenses, which include necessary and reasonable expenses such as court fees, attorney fees, and other costs directly related to the legal adoption of a child.
Paying attention to the changes in the annual tax codes can help you save money and manage your finances effectively.