Key Changes in 2025 for Taxes, Retirement Savings, and Medicare

The landscape of taxes, retirement savings, and Medicare are ever-changing. Every year, we see changes to the laws and limitations, such as tax rates, brackets, deductions, limitations on retirement plan contributions, and premium changes to Medicare, just to name a few. 2025 brings us some run-of-the-mill changes sprinkled in with some substantial changes that can largely benefit retirees and soon-to-be retirees.

If you're either in retirement or within three years or so of retirement, it's a good idea to start paying more attention to things like taxes, your retirement savings, and Medicare. Each one of these areas is key for retirees to understand because they each affect each other in one way or another. And if you don't have at least a basic understanding, you might find yourself missing out on opportunities to save a meaningful amount of money each and every year.

Welcome to the Retired-ish podcast. For those of you who don't know, my name is Cameron Valadez. I am a certified financial planner and enrolled agent. Today, I am discussing some of the most important and relevant changes coming in 2025 for soon-to-be retirees and retirees, starting with taxes. Yes. I know. Taxes. Who wants to hear about taxes? So boring. But hey. The more you know, the more you can potentially save.

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So, the first of the key updates I want to dive into for individual taxes is the typical annual adjustment of what is called the standard deduction. If you're not familiar, when you go to file your taxes, you're given the option to either use the standard deduction or itemize your deductions to help reduce your taxable income. You get to take the larger of the two deductions depending on your exact situation. Now the standard deduction is a dollar amount published each year by the IRS depending on how you file that you get to use to reduce the amount of money you pay taxes on.

Each year, it is typically adjusted upward to account for inflation. And for 2025, we get nice round numbers that are easy to remember. So the new standard deduction is going to be $15,000 if you file single or married filing separately, $30,000 for those filing married joint, and $22,500 for those filing as head of household. For those of you who will turn 65 during 2025 or are already over age 65 or blind, you get to take an additional $2,000 deduction if you're unmarried or an additional $1,600 if married. For example, if you and your spouse are each over age 65, your standard deduction in 2025 will be $33,200 in total.

Moving right along to tax rates. So the marginal income tax rates or percentages that apply to the different ranges of income are staying the same through 2025, which I will remind you are still historically very low. Although, the dollar amounts and ranges of the tax brackets themselves will be adjusting upward for inflation by about 3%. And depending on what the new administration does with tax legislation, the same historically low tax rates may continue beyond 2025. And I say that because they were initially set to go higher beginning in 2026 due to the sun setting of the Tax Cuts and Jobs Act, which many believe will be extended by the new administration. So, although you likely hate paying any amount of taxes at all, they aren't going away. And there's a high likelihood they go higher than they are today at some point over the rest of your life.

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That being said, if you're going to be paying taxes no matter what, you should be looking for ways to pay the lowest rates possible. Next up for tax changes, we also have an increase in the annual gift tax exclusion. Now, maybe you've never heard of this, so let me briefly explain. The gift tax exclusion is an amount you can gift any one recipient in the given year without that gift eating into what is called your lifetime exemption. For 2025, this annual exclusion is $19,000 per donee or person that you make a gift to or $38,000 if you're married. So you get that $19,000 per spouse per person that you give to. The lifetime exemption that I mentioned before is an amount per individual that you can either give away during your lifetime, so “gift,” or die with in your estate before your spouse, kids, or other heirs owe what is called estate taxes. Estate taxes are different from income taxes that you're used to regularly paying each and every year.

They're typically much higher due to the more compressed estate tax brackets. For 2025, that exemption is 13,990,000 per person, and for a married couple, it is 27,980,000. Most people don't ever have to worry about estate taxes because most people aren't worth millions and millions of dollars. However, this lifetime exemption has changed dramatically over the years and can actually go backward and be cut significantly. In fact, just as with the tax rates I mentioned earlier, the exclusion is currently set to revert back to about 7,000,000 per person in 2026 due to the sunsetting of the Tax Cuts and Jobs Act.

However, as I said, many expect the current administration under Trump to extend the larger lifetime exemption amount beyond 2026. Now, $7,000,000 per person might still seem like a number that many people will never hit, but I caution you and want you to be careful. For example, if you're 55 years old and have a retirement account or two worth, let's say, $2,000,000 today, you have a home worth $700,000, a rental property or multiple, and some cash in the bank, and you live to, let's say age 87.

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There's 32 years or so of some potential growth on those assets. And now 7,000,000 isn't looking so big anymore. And what if you receive some sort of inheritance from your parents? That money, unless you spend it, will also be part of your estate. And although most people don't plan for estate taxes, it's something you want to keep a close eye on because it can become very relevant for you in the future. And the key point is that this lifetime exemption is not guaranteed to rise throughout our entire lives. For example, we can't just assume that 10 years from now, the exemption will be $45,000,000 for a married couple. Again, like I said, it can go backward and change. So it's something that you just have to keep tabs on, and you need to have a good understanding of your net worth.

And by the way, I'm only referring to federal estate taxes. Depending on the state in which you live, your state might have its own state-level estate taxes. And those are usually a lot smaller limits than the federal limit. So that's something you want to make sure you check out.
Circling back to the annual exclusion of $19,000. The the $19,000 gift exclusion. If you decide you want to gift some money, let's say, to your adult children to help them out, you could give them up to $19,000 and not worry about affecting that lifetime exclusion amount. However, let's say you give them $100,000 in 2025 because you want to help them buy a home.

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This would mean that you will need to reduce your lifetime exemption amount by $81,000, which is the difference between the 19 and the $100,000 that you actually gave them. On a side note, if instead of gifting them cash directly, if you pay tuition or a hospital bill directly on someone else's behalf, it doesn't need to be your child. It can be anybody. There is no annual limit. So this $19,000 limit doesn't apply and it also won't affect your lifetime exemption either. Estate taxes and the inner workings of gift and estate taxes are very complex topics. So, if you think you might be in an estate tax situation, I highly advise you to connect with a competent estate planning attorney and or a financial planner to help you figure out the different ways to go about preserving your legacy in the most tax-efficient manner.

Okay. Onto our next topic. Let's dive into some retirement savings updates for those of you who might still be working. First and foremost, we have slight increases for the maximum amounts that you can contribute to certain retirement accounts in 2025. So starting with IRAs, for IRAs and Roth IRAs, the maximum amount is going to be $7,000 for the year for those who are under age 50, and $8,000 for those who are over age 50 at some point during the year. You can fund your IRA or Roth IRA for 2025 starting January 1st, and you will have up until the tax filing deadline in April of 2026 to do so.

If you are self-employed and you happen to have what is called a SEP IRA, you have until the extension deadline in October of 2026 if you file an extension. For something like a 401(k) plan, the new max you can contribute in 2025 from your paycheck is $23,500 if under age 50 and $31,000 for those who reach age 50 or over during the year. This is because those ages 50 and over get what is called a catch-up contribution of $7,500. So the 23,500 plus the 7,500 is how we get to that $31,000 maximum employee contribution. The new max contribution limits for IRAs and 401(k)s are only slightly higher than 2024.

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However, beginning in 2025, those ages 60 to 63 get a new and unique opportunity. This change is something brand new starting in 2025. We've never seen something like this before in the past, And it's essentially that those between the ages of 60 to 63 by year end in 2025 are allowed an even larger catch up contribution of $11,250. This means that they can put in a total of $34,750 from their paycheck into their retirement plan in a traditional pretax account or, if your plan offers it, a Roth account. This employee contribution limit does not include any voluntary after-tax contributions or, employer match, or profit sharing. You might be doing after-tax contributions if you're taking advantage of the mega backdoor Roth IRA strategy. If you're not, then don't worry about that. But those limits, that 34,750, that is the total amount that you can put in if you're between the ages 60 to 63 for the entire year.

And while not exactly specific to 2025 because it is currently allowed depending on your plan, your employer can now contribute to your plan, typically through profit sharing, with Roth contributions versus the typical pretax contributions. And I mentioned this because although it's currently available to do, it's still fairly new, and employers have only recently begun updating their plans to allow for this. And there are still many who haven't included these provisions yet or have chosen not to allow it altogether. And although it's allowed by law, the law doesn't require an employer to include these provisions in their plan. However, if your employer does begin to offer this in 2025 and you opt for Roth employer contributions, expect a 1099R tax form and consider adjusting your tax withholdings. This is because if your employer funds your Roth account, that's after-tax money, meaning it will go into your Roth, but you will still have to pay the taxes on it in the year that they contributed. So that tax form is what will report the taxable contribution made on your behalf. That might mean higher taxable income than you would have otherwise had if you were having pretax contributions put in before.

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You'll want to adjust your withholdings to make sure your taxes are paid. Otherwise, you might be in for a surprise at tax time. Lastly, let's get into the important changes with Medicare and Social Security. Now, we all know medical and health care costs tend to increase every year and typically at a rate much higher than the overall general rate of inflation. Medicare is no different. However, in 2025, we actually have some nice changes that can also reduce some healthcare costs for retirees. As a reminder, original Medicare consists of parts A and B. Part A, which is for hospitalization or what we call inpatient services, does not typically have a premium for the majority of people in retirement since most have paid into the system their entire working lives.

However, Part A does have an annual deductible that you may or may not be responsible for paying, depending on whether or not you have additional coverages, such as a Medicare Advantage plan or Medicare Supplement plan. The new Part A deductible in 2025 is $1,676. So unless you have additional coverage that might cover that deductible, this is the amount you will need to meet or pay first if you are hospitalized in 2025 before any other coverage from Medicare kicks in. Part B is a little different. Part B is for outpatient services like doctor's visits, x-rays, etcetera, and has its own annual deductible and premium. The annual deductible in 2025 for Part B is $257. The monthly base or minimum amount you will pay in premiums is $185 a month, and this is just $10.30 more per month versus 2024. And if you're already collecting Social Security, that Part B premium will be deducted directly from your check.

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And if you're not collecting Social Security yet but you are on Medicare, you will be billed quarterly for your Medicare Part B premium. And by the way, that is the minimum premium for Part B, that 185 a month. Depending on your income, you may pay a surcharge each month known as IRMAA or the income-related adjustment amount. If you aren't familiar with IRMAA, you can check out some previous episodes we have to learn more. We have a few out there that discuss the different components of IRMAA. I'll put a link in the episode show notes if that's something that you want to look into.
When it comes to the two components of original Medicare, costs have gone up slightly versus 2024. But hang on because I have some good news for you. When it comes to prescription drugs and Medicare, there are two ways to get insurance here. One way is through a Medicare Advantage Plan that bundles in your drug coverage into the overall health plan, And the other is to have a standalone prescription drug plan. These are often referred to as Medicare Part D prescription drug plans. So they're easy to remember. Just think d for drugs. Typically, you have Part D if you either only have Parts A and B and no other additional coverage. But you need that prescription drug coverage, or you choose a Medicare supplement plan, that's another case where you would need to go get a standalone prescription drug plan since those Medicare supplements do not include or bundle any prescription drug coverage. However, even if you have a Medicare Advantage plan that includes your drug coverage, it's sort of like its own policy with your own health plan.

[00:17:41]:
What I mean by that is it typically has its own deductible, co-pays, coinsurance, etcetera, and it will also have its own list of drugs that it will cover, known as the formulary. When it comes to the standalone Part D prescription drug plans, there is also an annual deductible that you need to meet before the insurance kicks in to share any costs with you. For 2025, that deductible can be up to a max of $590 a year. Now, I say up to because some plans may choose to have a lower deductible, which can be a good thing. What I find for many retirees who have Medicare is that the bulk of the costs out of pocket, other than the potential premiums that someone might pay, comes from the prescription drugs, especially at the beginning of every year. This is because many people who have prescriptions take at least one brand-name drug, and brand-name drugs are very expensive. What that means is that each year starting in January, you will pay out of pocket up to your plan's deductible when getting your prescriptions filled, which could be as high as that $590 in 2025. Then after that deductible is met, the plan will kick in and share in the cost of the drug or drugs as long as they are part of that plan's formulary.

Know that there are many common drugs that your plan may cover nearly in full after the deductible is met. We just typically see the big name or big brand name drugs cause much of the out-of-pocket expenses. Here's an example. If you refill your prescriptions, let's say, every 90 days, and you take an expensive brand name drug that costs $1400 for the first fill for 90 days. And then, after the deductible is met, the insurance company kicks in, and there's some coinsurance, and then your cost goes to, say 275 per fill. Again, after you've met that deductible, in this scenario, you'll meet your deductible of $590 in the first quarter of the year because, again, your one drug costs $1400. Now you'll be out of pocket for the 590 plus the drug plan premium, whatever that ends up being, plus the coinsurance amount.

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So your first quarter, in this case, might be a cash outlay of, let's say, 7 to $800 in this example. But then it might be reduced to about $275 or so for each quarter thereafter. Now historically, these drug plans have had very confusing coverage limits and have had high out-of-pocket maximums until you got to what was called the catastrophic coverage phase. For example, if you were to be taking even just two brand-name drugs, you could be paying 1,000 out of pocket each year even though you had one of these prescription drug plans. And the good news is that starting in 2025, that's completely changed. Now, there will be a cap on out-of-pocket spending for drug plans of $2,000 per year, no matter the coverage type. So whether it's through a Medicare Advantage Plan or a standalone drug plan, it doesn't matter. This means that once your deductible coinsurance and co-pays hit $2,000 total, you're done and now completely in the insurance company's pockets.

However, please know that cap, that $2,000 cap won't apply to the premiums. It won't apply to any drugs not covered by the plan's formulary and not any drugs that might actually be covered by Medicare Part B, such as an injection at the doctor's office, for example. In the hypothetical scenario I just gave you, you would be spending about $1600 per year, not including the premiums. So, in this case, the new out-of-pocket max of $2,000 wouldn't have any effect on you necessarily. However, let's say down the road, you begin taking more medications, especially brand-name meds. That $2,000 cap could save you thousands of dollars each year, not to mention that the cost of certain drugs tends to go up over time. So, the out-of-pocket cap should help there as well.

[00:22:06]:
Also new for 2025 because the drug prices can be very high at the beginning of the year due to having to meet that deductible and the high costs of a lot of certain brand name drugs, Medicare also created a new payment plan for prescriptions so that you can spread the cost out over the entire year. Now, this doesn't reduce what you pay. It just simply allows you to budget the expense out over the entire year so you don't need to come up with a lump sum at the very beginning. This is a nice feature that I think many people will take advantage of, especially those on relatively low fixed incomes.

So that's it for some of the more important Medicare changes. Now, I want to move into Social Security. For Social Security, we have our run-of-the-mill changes that we pretty much have each year. However, I still think that they're important to know. And the first is that those who are already collecting or are at least eligible to collect at age 62 will get a two-and-a-half percent cost of living adjustment for 2025. Based on the average amount in monthly benefits, this helps make up for some of the increases in Medicare premiums, which is pretty helpful.

And there have been years in the past where Medicare costs have actually increased more than the cost of living adjustment for Social Security. So, for this year, it doesn't look like that's going to be the case. Now, if you aren't collecting yet, but you're at least age 62, your would-be benefit will still receive that cost of living adjustment, which will benefit you down the road once you do decide to collect.

Next is for those of you still working or running a business. The new base wage amount for employees paying into Social Security, which is a rate of 6.2% that comes out of your paychecks, is $176,100. This means that every dollar you earn up to that limit will be taxed at 6.2%, assuming you pay into Social Security and don't pay into another pension system that disqualifies you.

[00:24:19]:
And this is about a four-and-a-half percent increase versus 2024. If you're self-employed, as you probably know, you're going to pay the employer's portion of that as well as your portion as the employee. So it'll actually come out to 12.4%. But, again, that rate has always pretty much been the same. That's not changing. It's just the income limit to where that rate will apply.

With the new administration set to take over next year, we have yet to see exactly what will happen with other legislation and tax laws. Regardless, there will likely be much opportunity for some creative financial and tax planning to take advantage of whatever policies are put in place.
So be sure to stay informed of the current landscape and work with your professionals. If you've made it this far, you obviously care about how these upcoming changes might affect you. And since it's the holiday season, I'm going to provide you with a free downloadable PDF of the new tax rates, schedules, Medicare surcharge brackets, retirement plan limits, and more for 2025 to help you with your future planning endeavors. You can access the download by visiting the episode show notes. The link to the show notes will be right there, available on your podcast app or on our website at retiredishpodcast.com.

If you find the strategies and information I provided in today's show actionable, valuable, and insightful, please subscribe to or follow the show on your podcast app. Also, be sure to check out the Retired-ish video newsletter to get more useful information on retirement planning, investments, and taxes once a month straight to your inbox. Just watch or listen. You don't even need to read it.

[00:25:57]:
Of course, if you want to learn more about the topics I went over in the show today or you want to ask a question to be answered on a future episode, you can find links to the resources we have provided in the show notes right there on your podcast app, or, again, you can head over to retiredishpodcast.com/58. Thanks again for tuning in and following along. See you next time on Retired-ish.

Disclosure [00:26:41]:
Securities and advisory services are offered through through LPL Financial, a registered investment adviser, member FINRA SIPC. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual.

To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax adviser.

Neither LPL Financial nor its registered representatives offer tax or legal advice. Always consult a qualified tax adviser for information as to how taxes may affect your particular situation. Tax and accounting related services offered through Plan-it Business Services DBA Planable Wealth.

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