What tax changes took effect on January 1, 2025?

Key changes include bonus depreciation dropping to 40 percent, the estate tax exemption rising to $13.99 million, new enhanced catch-up retirement contributions of $11,250 for ages 60-63, final RMD regulations taking effect requiring annual distributions under the 10-year rule, and the annual gift tax exclusion increasing to $19,000.

What is the estate and gift tax exemption for 2025?

The federal estate and gift tax exemption for 2025 is $13.99 million per individual, or nearly $28 million for married couples. This is expected to be the last year at this elevated level, as the TCJA's doubled exemption sunsets after December 31, 2025, dropping the exemption to approximately $7 million per person.

New Tax Laws for 2025: What Changed on January 1 | Lynch Law

January 1, 2025, brings a series of tax changes that affect business owners, retirees, investors, and individual taxpayers. Some of these changes were planned well in advance; others reflect the ongoing implementation of legislation enacted in recent years. Understanding what changed and how it affects specific planning decisions is essential to starting the new year on sound footing.

Bonus Depreciation Drops to 40 Percent

The most immediate change for business owners is the continued phasedown of bonus depreciation under Section 168(k). After providing 60 percent bonus depreciation in 2024, the rate drops to 40 percent for property placed in service in 2025. This means that businesses acquiring qualifying equipment, machinery, or qualified improvement property in 2025 can deduct only 40 percent of the cost in the first year, with the remaining 60 percent depreciated over the applicable recovery period. Section 179 expensing remains available as an alternative for smaller expenditures, with a 2025 limit of approximately $1,250,000.^[1]

Estate and Gift Tax Exemption Reaches $13.99 Million

The inflation-adjusted estate and gift tax exemption for 2025 is $13.99 million per individual, or $27.98 million for married couples. This is the highest the exemption has ever been, and, absent congressional action, it will be the last year at these elevated levels. If the TCJA sunsets as scheduled on December 31, 2025, the exemption reverts to approximately $7 million in 2026. The anti-clawback regulation under Treasury Regulation section 20.2010-1(c) protects gifts made under the current higher exemption, making 2025 a critical year for estate planning.^[2]

Enhanced Catch-Up Contributions for Ages 60-63

SECURE 2.0 introduces a new enhanced catch-up contribution limit for participants in 401(k) and similar plans who attain ages 60 through 63 during the year. These participants can contribute catch-up amounts of $11,250 in 2025, compared to the standard catch-up limit of $7,500 for those aged 50 and older. This provision provides a meaningful additional savings opportunity for participants in this age range who are in their peak earning years and approaching retirement.^[3]

RMD Final Regulations Take Effect

The final regulations governing required minimum distributions from inherited retirement accounts take effect for the 2025 distribution year. Under the finalized rules, most non-eligible designated beneficiaries who inherit accounts from decedents who had already begun taking RMDs must take annual distributions during the 10-year distribution period. This ends the transitional relief that the IRS had provided since 2022 and creates immediate planning obligations for beneficiaries of inherited retirement accounts.

Roth Catch-Up Requirement Delayed to 2026

SECURE 2.0 originally required high-earning employees (those with wages exceeding $145,000 in the prior year) to make all catch-up contributions on a Roth (after-tax) basis beginning in 2024. The IRS subsequently delayed this requirement to 2026, giving plan administrators and participants additional time to prepare. For 2025, high earners can continue to make pre-tax catch-up contributions if they choose.

Annual Exclusion for Gifts Increases to $19,000

The annual exclusion for gifts increases to $19,000 per donee for 2025, up from $18,000 in 2024. This means an individual can give up to $19,000 to any number of recipients without using any of the lifetime gift tax exemption or filing a gift tax return. For married couples who elect gift splitting, the effective annual exclusion is $38,000 per donee. This increase, while modest, can be significant for families engaged in systematic annual gifting programs.

Other Notable Changes

The standard mileage rate for business use of an automobile is 70 cents per mile for 2025. The foreign earned income exclusion increases to $130,000. The Social Security wage base increases to $176,100. The maximum contribution to health savings accounts increases to $4,300 for individuals and $8,550 for family coverage.

Business owners and individuals should review these changes with their tax advisors early in the year to identify any adjustments needed to withholding, estimated tax payments, retirement plan contributions, and estate planning strategies. In a year where the TCJA's future hangs in the balance, proactive planning is more important than ever.

References

^[1] I.R.C. § 168(k)(6) (bonus depreciation at 40% for property placed in service in 2025); I.R.C. § 179(b) (Section 179 limitations for 2025).
^[2] Rev. Proc. 2024-40 (setting the 2025 estate and gift tax exemption at $13.99 million); Treas. Reg. § 20.2010-1(c) (anti-clawback rule).
^[3] I.R.C. § 414(v)(2)(E) (SECURE 2.0 enhanced catch-up contribution limit for ages 60-63).