The IRS has announced new income limits for its seven tax brackets for 2025, with income thresholds increased by about 2.7% to adjust for inflation. This follows a 5.4% increase in 2024 and a historically large 7% bump in 2023.
Reaching a top one percent income is becoming more challenging given the threshold keeps increasing ($650,000+). However, at least those whose incomes aren’t keeping pace with inflation can expect some tax relief.
Let’s dive into the 2025 income tax brackets and standard deduction amounts. Then we’ll explore the new ideal income targets for single filers, married filers, and retirees. For the nearly 50% of working Americans who pay income taxes, these brackets often represent our largest ongoing expense.
Special limited-time promotion: If you have over $250,000 in investable assets, take advantage and schedule a free consultation with an Empower financial professional here. Complete your two free video calls with the advisor by November 30, 2024, and you’ll receive a free $100 Visa gift card.
After a great run in stocks, another recession could hit. It’s always a good idea to get a second opinion about how your investments are positioned, especially from a professional. Speaking to a financial professional in 2013 helped boost my net worth by an additional $1 million.
2025 Income Tax Brackets
The seven federal income tax rates, established by the 2017 Tax Cuts and Jobs Act, remain at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Before the 2017 Tax Cuts and Jobs Act, the highest marginal federal income tax rate was 39.6%.
Income levels are based on taxable income (not gross income or adjusted gross income). Taxable income is calculated by subtracting the standard or itemized deduction—whichever is greater—from your adjusted gross income (AGI).
The Ideal Income to Earn in 2025 – 24% Tax Bracket
In my opinion, the highest federal marginal tax bracket one should aim to pay is 24%. Beyond this, every dollar earned above $197,300 for singles and $394,600 for married couples in 2025 gets taxed at 32%, marking a steep 8% jump.
If you’re working in a high-tax state, you could easily be paying close to 40% of each dollar above the 24% bracket threshold. Does paying 40% or more of your income sound appealing? Personally, I’d rather not work harder for that next dollar if I’m only going to keep 60 cents of it.
Even at the top end of the 24% bracket, a reasonable total effective tax rate of 20%–25%—even in high-tax states like California—supports a fair contribution to our country. Paying one-quarter of your income to support our nation is, in my view, reasonable.
No Need to Make Big Bucks to Be Happy
Earning up to $197,300 as a single filer or $394,600 as a married couple in 2025 supports a mass affluent lifestyle. Even in high-cost areas like the Bay Area, a $300,000 income for a family of four provides a solid standard of living.
Even in cities with the median home price above $1,000,000, by earning a household income in the 24% tax bracket, you can still afford a home, save for retirement, support your kids, and take vacations. What more do you really need?
Once your effective tax rate crosses ~33%, the motivation to earn more often declines, as higher earnings tend to come with significantly more work and stress. If the opportunity arises, go for it, but you may find that earning well beyond $200,000 per person or $400,000 for a couple doesn’t greatly improve your quality of life. Instead, earning more could actually make you miserable!
Rather than chasing riches, consider retiring young and free to spend your time as you wish.
Marriage Penalty Tax Threshold Increases in 2025
For the 10%, 12%, 22%, 24%, and 32% tax brackets, the income thresholds for married couples filing jointly are double those for singles. This creates tax parity, eliminating the marriage penalty for these brackets.
However, at the 35% bracket, the gap appears. The threshold for singles is $626,350, but it’s only $751,600 for married filers. If the thresholds were truly equal, the married income limit would be $1,252,700.
Couples earning a combined income above $751,600 may face a marriage penalty of around 2% for every dollar earned beyond this limit. For example, a couple with two $600,000 incomes would pay roughly $8,968 more than two single filers at that income level. While that penalty may not feel steep at the top 1% income level, it’s not ideal when you’re already facing over $300,000 in taxes!
It’s strange the government doesn’t believe in equality between spouses across all income levels.
The Ideal Income For A Married Couple In 2025: $400K Sample Budget
I’ll use $400,000 as the ideal gross income for a married couple, as it’s easy to remember. Plus, Democrats have stated they won’t increase taxes on households making $400,000 or less. Assuming they keep this promise, it’s good to know there’s a tax cap at this level.
As shown in the budget, after 401(k) contributions and the $30,000 standard deduction, the taxable income is reduced further. I estimate this household’s overall tax bill is a reasonable $81,000, or 25% total effective rate. Their cash flow after all expenses is higher due to itemized deductions, but I use the standard deduction for simplicity’s sake.
Paying up to a 24% marginal income tax rate is ideal because:
- You make enough to live a great life and provide for your family.
- You can max out your tax-advantaged retirement accounts
- The marginal income tax rate is high enough where you feel good contributing to society.
- The marginal income tax rate is low enough where you still get to keep more than three times your income.
- Depending on the industry, you may not have to work long hours to earn the income that pays a 24% tax rate.
- You’re still able to donate money to causes you care about.
- You can comfortably own a nice, but not extravagant home.
- You can comfortably save and pay for your children’s college education.
- Paying for three weeks of vacation a year is not a burden for a family of four.
- You can send your kids to private grade school and pay full tuition if you choose.
- You can drive a safe car or two.
2025 Standard Deduction
The 2025 standard deduction for married couples is $30,000, an $800 increase from 2024. For singles, the deduction is $15,000, up by $400. Finally, these rounded figures make them easier to remember!
For heads of household, the 2025 deduction is $22,500, an increase of $600 from 2024.
In my example budget above, I’ve used the $30,000 standard deduction for simplicity. However, since the couple’s itemized deductions exceed this amount, they’ll end up with additional cash flow at year-end.
The couple’s taxable income results from subtracting 401(k) contributions and the standard deduction. To present a clearer picture of their cash flow, I add back the $30,000 standard deduction, as it’s a non-cash expense.
Long-Term Capital Gains Tax Rates for 2025
In 2025, single filers can qualify for the 0% long-term capital gains rate if their taxable income is $48,350 or less. For married couples filing jointly, the threshold is $96,700. Not bad!
With the $30,000 standard deduction, a married couple could earn up to $126,700 ($96,700 + $30,000) and still pay 0% on long-term capital gains. For singles, that cap is $63,350 ($48,350 + $15,000). However, watch out—exceeding these thresholds by even one dollar triggers at least a 15% capital gains tax rate.
Given these favorable capital gains rates, there’s even more incentive to generate passive investment income. Long-term capital gains are taxed at significantly lower rates than short-term gains, with the most substantial difference between the 32% and 15% brackets. Staying within this range can maximize your savings on capital gains taxes.
The Ideal Income For A Retiree In 2025 And Beyond
From a tax perspective, an ideal gross income for retirees in 2025 is around $126,700 for married couples or $63,350 for singles. This level allows retirees to take full advantage of the 0% long-term capital gains tax rate on investment income, as long as their taxable income stays at or below $96,700 (for married couples) or $48,350 (for singles).
With the addition of the standard deduction of $30,000 for married couples or $15,000 for singles, a retiree household could potentially bring in up to $126,700 without paying capital gains taxes on qualified investment income.
The bulk of this income can be sourced from:
- Social Security: This income can be partially or fully tax-free depending on other income sources.
- Qualified Dividends and Long-Term Capital Gains: These types of investment income can fall under the 0% tax bracket up to the ideal income threshold, allowing retirees to draw down their investments tax-efficiently.
- Tax-Deferred Accounts: Distributions from 401(k)s or traditional IRAs may be taxed at ordinary income rates, so balancing these with capital gains and Social Security can help maintain a favorable tax position.
Benefits of Retirees Staying Under the Threshold
By targeting an income level that keeps taxable income within the 0% capital gains bracket and below the 24% ordinary income tax bracket, retirees can:
- Minimize Federal Tax Burden: Staying within these thresholds can help retirees avoid high marginal tax rates on additional income.
- Maximize Portfolio Longevity: A tax-efficient drawdown strategy allows retirees to preserve more of their portfolio by reducing annual tax liabilities. A retiree can also be more confident in raising their safe withdrawal rate when desired.
- Leverage Roth Conversions: If retirees find themselves with taxable income well below the threshold, they can consider small Roth conversions to manage future tax liabilities without pushing themselves into a higher tax bracket.
Personally, I’m perfectly happy to pay a 15% long-term capital gains tax rate. As a result, earning up to $600,050 in capital gains a year would be nice. But we’re still a long ways away.
Your View On Taxes Will Change As You Get Older
In my 20s and 30s, I accepted paying a federal marginal tax rate of 32% to 39.6%. With time, energy, and a strong drive to become a millionaire, I was willing to shoulder the cost to build a net worth that could generate passive income.
When I negotiated a generous severance package in 2012 at age 34, my income plummeted by 80% the following year. Although it stung to earn so much less, I was thrilled to pay 90% less in taxes! It felt amazing to enjoy public parks and free museums in the middle of the day and finally benefit from what my six-figure tax bills had been funding.
After turning 40, I began valuing my time far more than money. With the birth of my children and the passing of more people I know, it no longer felt worth it to push beyond the 24% marginal tax threshold.
If you’re earning top dollar but feeling burned out, consider aggressively saving for three more years, then scaling back. Life is too short to work long, stressful hours just to hand over more than a third of your income in taxes.
Ways To Reduce Your Income Tax Bill
If you’re a W2 earner looking to reduce your income tax burden, here are some effective strategies to consider:
- Non-Qualified Deferred Compensation Plan (NQDC): Ask your employer if they offer an NQDC, allowing you to defer a portion of your compensation for the future.
- Max Out Your 401(k): Contribute the maximum to your tax-deferred 401(k) each year, especially if you’re in a higher federal tax bracket.
- Donate Appreciated Assets: Contribute appreciated assets to charity through a Donor-Advised Fund instead of cash to maximize tax benefits.
- Contribute to an HSA: Use a Health Savings Account (HSA) as a retirement vehicle if you have a high-deductible health plan.
- Invest in Startups: Direct investments in startups can provide tax benefits through Qualified Small Business Stock (QSBS), though diversification is crucial to manage risk.
- Own Your Primary Residence: Take advantage of deductions on mortgage interest and property taxes.
- Invest in Opportunity Zones: Real estate investments in designated opportunity zones can offer tax advantages.
- Start a Business: Consider launching a business to benefit from deductible business expenses.
- Conduct a Backdoor Roth IRA: If you’re unemployed or in a low-income year, consider a backdoor Roth IRA conversion to benefit from a lower marginal tax rate.
- Relocate to a state with no income taxes: Here are the states with no income or inheritance tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
- Work Overseas: The Foreign Earned Income Exclusion (FEIE) is a tax benefit that allows U.S. citizens and resident aliens working abroad to exclude a certain amount of their foreign-earned income from U.S. federal income tax. For tax year 2024, the maximum foreign earned income exclusion is $126,500 per person, and $253,000 for a married couple. The amount will go up in 2025.
Readers, what is the maximum federal marginal income tax rate you are willing to pay? What do you think is the ideal income to live a great life as a single or married couple?
Diversify Your Investments Into Real Estate
In addition to investing as much as possible in your 401(k), also consider diversifying into real estate. You can buy your primary residence and you can also invest in private real estate funds for further diversification.
Fundrise runs private real estate funds that predominantly invests in the Sunbelt region where valuations are lower and yields are higher. Its focus is on residential and industrial commercial real estate to help investors diversify and earn passive returns.
Fundrise currently manages over $3 billion for almost 400,000 investors. I’ve invested $954,000 in private real estate funds since 2016 to diversify my investments and make more money passively. After I had children, I no longer wanted to manage as many rental properties.
Fundrise is a long-time sponsor of Financial Samurai and Financial Samurai has invested over $270,000 in Fundrise so far.
Get A Free Financial Consultation From A Professional
If you have over $250,000 in investable assets, schedule a free consultation with an Empower financial professional here. Complete your two video consultations before November 30, 2024, and you’ll receive a free $100 Visa gift card. There is no obligation to use their services after. The promotion has been extended by a month. Take advantage.
A year after leaving finance, I had two free consultations with an Empower financial professional that revealed a major blind spot. I had 52% of my portfolio sitting in cash, thinking I needed to invest like a conservative 65-year-old.
The financial professional reminded me that at 35, I still had many financial opportunities ahead. Within three months, I invested 80% of that cash and used the rest for a down payment on a fixer-upper—both decisions paid off well.
The statement is provided to you by Financial Samurai (“Promoter”) who has entered into a written referral agreement with Empower Advisory Group, LLC (“EAG”). Click here to learn more.
Subscribe To Financial Samurai
Listen and subscribe to The Financial Samurai podcast on Apple or Spotify. I interview experts in their respective fields and discuss some of the most interesting topics on this site.
Join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Get smarter and more knowledgeable each week.
Note: I’m not a tax professional, only a tax enthusiast. Consult a tax professional before making any tax decisions. If you see something wrong with the numbers, feel free to point it out and I’ll correct it.
