2025 Income Tax Brackets and Rates

This is the Truth Network. Welcome to Finishing Well. Brought to you by CardinalGuide.com. With certified financial planner, Hans Scheil, best-selling author and financial planner helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Well. Welcome to Finishing Well with certified financial planner, Hans Scheil, and today's show, 2025 income tax brackets and rates.

They're out, and so we have some updates for you. We think we got it, but it takes a while to understand it. And there is one woman in Scripture that really pushed the edge of the envelope the more I've thought about it this Christmas. Like, oh my goodness, this was a prostitute, actually, that came into the local pastor, the Pharisee's house. Jesus was sitting there eating, and she gets up behind Jesus, breaks an alabaster jar, anoints his feet, washes his feet with her tears, but then she proceeds to start to kiss his feet. In fact, Jesus puts it that she has not stopped kissing my feet since, you know, she came in. And when you really consider what's happening there, this prostitute is the one person that we can see in Scripture that gets to kiss Jesus in lots. She kisses him and kisses him, and why?

Because we don't understand how good we've got it. The only reason she got to kiss Jesus is because she tried, and she loved much. And so she was forgiven much. And as we begin to really understand all that God has for us, even in these tax brackets, you know, we can begin to actually move into the blessing that comes from understanding, which we're hoping this show will help you get.

Right, Hans? We're under the Tax Cuts and Jobs Act, and we've been there since 2018. And then through 2025, we're under the tax rates of the Tax Cuts and Jobs Act. And the way 2025 is different than 2024 is the automatic inflation increases. So they don't have to pass a bill in Congress signed by the president to adjust the brackets up for inflation.

That's automatically written into the law. But the thing I want to get across to people is we've been saying on this show, really, ever since this Tax Cuts and Jobs Act was passed, which was eight years ago, we've been saying that this thing has a sunset to it, that in 2017, they were cut back in 2017. They're going to go back to what they were before this Tax Cuts and Jobs Act was passed. So and it was pretty substantial tax cut. And so then we've had the 2024 election, and Trump won, the new administration's coming in and all through the campaign. But really, both sides were promising, oh, we're going to extend those tax brackets and that the other side, or the Democrats were saying, we're going to extend them for people of average means, but the high income earners, we're going to raise them and we're going to raise them even more.

But regardless, they were both saying, when I'm elected president, I'm going to lower the tax rates, or I'm going to extend these things, these low rates. They're certainly going to get that done. Or they're certainly going to get part of it done. But I'm also of the belief and the knowledge that it's going to be more difficult than they ever imagined to get this done, because it has to be passed first by Congress. And Congress needs to really invent their own deal. I mean, it's not like you take a bill over to Congress and you say here, introduce this bill and pass it. And what it really amounts to is the current law has these tax rates going up substantially in 2026.

And we've been planning for that, like it was going to happen. And it's still the current law that it's going to happen. But I'm of the belief that they will be successful in extending that. But that's not a tax cut. That just means they're going to stay where they are. For the last eight years, or seven years, or however you want to calculate it. So they're going to keep them low longer.

Okay. Now, I think in order to accomplish that, they're going to have to give up something toward the budget because we have deficits. I mean, the deficit is like $2.7 trillion for 2024.

I mean, if you had any idea what kind of money that is, I mean, we're spending a lot more money than we're taking in in taxes. And so that was the whole reason for the sunset in the first place, is the only way they could get it passed in Congress was to justify it and to say, okay, so we're going to pay for this for eight years. And we're going to do it in this way. And it has the inflationary increases. And then it's over with.

In eight years, and then it goes back to where it was. I mean, that's actually written into the law. And it had to be that way through the negotiation just to make the thing work. So now we're going to have to pay for it again. And I think they're going to do a lot of budget cutting.

I mean, you can. And so I don't purpose of this show is not to really get into the politics or the strategy around change in the tax code. It's to teach you and explain to you how these tax brackets and the tax system works. And the reason I make that a purpose is I'm a tax planner.

I'm a financial planner. We here at Cardinal, that's what we do. That's what Tom does. It's what I do.

Our other CFPs. We look to the future. And we do retirement planning, financial planning, tax planning, is we plan out your money and your budget. For the rest of your life. Once you're retired, go ahead.

No, I'd just say I love the way you and Tom both put it. It's pretty simple that your taxes are one of the most expensive costs in retirement. One of the biggest things that you could possibly give out a lot of your money for. And essentially, the less in taxes you pay, the more you keep. And it could be a substantial percentage if this stuff is planned right. There are angles in retirement to these brackets that just aren't as applicable to me prior to retirement, right?

That's correct. And so let's just dig in with some examples. So when we look at married filing joint. So now we're looking at a couple and this couple are both 65 plus.

Okay. So right off the bat, they get a standard deduction of $30,000. And then they get an additional $3200 for being what Social Security, I mean, excuse me, what the IRS describes as aged.

So that's what you and I are, Robbie, we're aged. Imagine the government putting that term right in there. I mean, if some business put that in there, they would be after him for being discriminatory or something. I mean, it just doesn't sound, sound good. But anyhow, 33,200 is our standard deduction.

Okay, there's a couple. So that means you can make $33,200 and pay zero taxes, zero percent tax rate. I mean, you can make that much.

And actually, if you made a certain amount of Social Security, plus you made other money, and it added up to 33, I mean, you have to more than that. So that's your standard deduction. And so that's going to come off the number before you get to paying taxes in your tax bracket. So I want to go with this couple, if their income after they took the standard deduction was $96,950 a year in 2025, they would be at the very top of the 12% tax bracket.

Okay. So really means that their income is 120, about $130,000. And then they take the standard deduction, and they come up with $96,950, and they would pay 12% taxes. Now, what they would actually pay is $11,157 in federal income tax.

Okay. Right. So you look at that, and you say, well, that is less than 12%. And the reason it is, is the first $23,850, they pay 10%. And then the amount between 23,000 and 96,000, they're paying 12%.

And so they have an effective tax bracket, tax rate of 11.5%. And so I'm sure some of you might be listening, why am I listening to this? This is just a bunch of numbers and garble and all that kind of thing. Well, we're listening to it because we're telling you what the deal is next year. And it is smart for you to know where you fall on this list. Okay. We're going to figure out where you are, and then we're going to make recommendations to you about how you can manipulate this number to your advantage, your income number. Okay.

Exactly. Well, it actually would be a really good point to pause and say, hey, we want to remind you that this show was brought to you by Cardinal Guide, cardinalguide.com. And there you're going to find when you go to cardinalguide.com, that there are these tabs.

We call them the seven worry tabs. And if you click on, obviously the tax tab would be the show that we have today. There's some beautiful show notes, including a wonderful board that shows you these tax rates and shows you these examples.

Number by number actually even has Tom go through these examples with you line by line to see how exactly that all comes together. And you can find all that on the tax tab of the seven worries there at cardinalguide.com. And you can also find Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, the famous contact information for Hans and Tom, of course, to make this so easy is just to get up with them and they can help you put all this stuff in their software and see how to put these financial plans together. It's all there at cardinalguide.com.

So we'll be back in a minute with a whole lot more on this 2025 tax brackets and rates. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency.

Welcome back to Finishing Well. Certified financial planner, Hans Scheil. Today's show is the 2025 income tax brackets and rates. They're out.

And really helpful information as we go through this. We're still looking at the married couple, right, Hans? Yeah. So we're looking at this married couple and their income is $130,000 between the two of them. And it's – none of it's from Social Security so they haven't started it yet because that changes things.

So I'm just doing that for the example. But let's say they have $130,000 gross. They take the standard deduction of $33,000. It brings their income down to right at $97,000 and they pay $11,157 of tax or 11.5%. And what I'm going to tell you is if you ask most couples, because I do it all the time, what would your taxes be on $130,000 a year if they're making $130,000 a year between the two of them? They would guess a number much higher than $11,157. I mean, sure, if they live in North Carolina, they're going to have another $4,000 of income tax.

So that would bring it up higher. But I mean people generally use a number of about 40% and they're thinking that they're going to pay like $50,000 of taxes on their $130,000 or $40,000 because they're using their paycheck when they were working to really determine all that. Because on your paycheck, they're not just taking federal income tax, they're taking Social Security tax and Medicare tax and your 401K contribution. And people tend to lump all that in and they think they're paying much higher taxes than they really are. So a lot of people are misinformed about this stuff, which is okay. They're paying actually less tax because they're in retirement now than they thought they were.

And so why do you need to listen to this show? And what I'm saying is these tax rates are historically very low. And most people that come into us, they've got some money in a retirement account that they're either going to start tapping or they're going to not tap it and they're going to postpone tapping it until they have to until they're 73 years old. And we look at just everyone for Roth conversions and that's when we go to these charts. So if we took the same couple and they had $500,000 in an IRA and they pay any tax on it, they're not anywhere near 73 yet.

And so they know that's common. They usually want to know what that's going to look like tax wise, but they know they can just take none of it and don't pay any tax. And what we're going to propose to them is perhaps we'll just start with $10,000. You could do a $10,000 Roth conversion.

And let's look and see what that would look like. Now, they're going to pay 22% tax on the $10,000 Roth conversion because they're going to slip into the next bracket. So that's going to be $2,200 that they're going to pay now that they didn't really have to pay. But that's going to make the whole $10,000 tax free now really forever, even beyond their life. Because if they give that to their children in an inheritance, their children are going to be able to withdraw that without paying any tax. So all I'm thinking at is that's one way we want to understand these brackets and understand where we are so that we can calculate in advance the price of a Roth conversion. Okay?

Yeah. Now, let's slip over to single people and a single person that had, let's just say the same $130,000, but now it's just one person. And they're filing a single tax return. So their standard deduction in 2025 is going to be $17,000. So if we took 130 minus 17, we'd have $113,000 of taxable income, which would put them a little bit into the 24% tax bracket. I mean, the top of the 22% tax bracket is $103,000 for a single person. So on that last $10,000 of their income, they'd pay 24%. But from 48 to 103,000, they'd only pay 22%. From 11,000 to 48,000, it's 12%, and they still get to pay 10% on the first 11,000. So it produces an effective tax rate of about 18%. Okay? That's about what their tax rate, effective tax rate would be, even though they jumped into the 24% bracket, and their total tax would be about $20,000.

Okay? To go through that a little slower for those that don't have a mathematical mind, like me. So to go at it from a different angle, essentially, is it the first 11th, or the first tax bracket is 10%, right? Right. And so the very first, what is it, 24,000 they make? 30? Well, that's actually for the couple, because we're on to the one person now, the single person.

Okay. It's the first 11,295 is taxed at 10%. So essentially, that first bucket of money is taxed at the same low rate that anybody would have. In spite of the fact that they're in the 24% tax bracket, that first bucket of money is at that rate, then the second bucket of money would be at the next rate. And that's the reason the effective tax rate is going down, right? Right.

Okay. So we go from 11, that second bracket, which is 12%, is 11,000 to 48,000. So that means there's about $37,000 in that bracket that's taxed at 12%.

Okay? And then from 48,000 to 103,000, that tax rate is 22%. And, you know, that's about 52,000, 55,000 is taxed at 22%. And then it's only 10,000 for this single person that gets taxed at 24%. And so you get this effective tax rate, or when you blend all these numbers together and average them according to the size of the bucket, comes out to about 18%. Still, substantially less tax than people think that they're paying. Okay?

Right. And, again, why do we need to know this information? Well, if we're doing tax planning for either an individual or a couple, and a lot of single people – first of all, a lot of single people, they don't have income this high in retirement. So I've kind of ramped the numbers up, but let's just assume they do. And they have this, and then if they've got an income this high, they probably have money in an IRA or 401K or they've got retirement money sitting there that they are not taking because they don't want to pay taxes. And the tax man or tax lady, Uncle Sam, is going to get them sooner or later.

We've been over that in a lot of other shows. So they may want to think about Roth conversion. And this single person, they can go all the way to $197,300 and pay taxes at 24%. So this single person may sit and say, you know, if I did a $50,000 Roth conversion, 24% federal tax of $50,000 is about $12,000, and then some state income tax, which would probably be another $2,000. And that's a pretty hefty voluntary tax bill, but people do it because they want to turn taxable money into tax-free money. And other shows, we go over the benefits of having Roth money, and these tax rates are historically low. It's my belief that tax rates are going to have to go up substantially over time. They just are to pay for all the government spending that we do and all the deficit spending.

So if you agree with me, and that's true, I don't think this is going to happen next year and the year after because of the current administration. But I think that over the long haul, these things are going to go up. Being able to pay taxes on your retirement money at 24% or 22% or some level of that and doing a conversion makes a lot of sense.

So that's why we study these tables. Yeah, absolutely, because being able to get that Roth money after you're in retirement and you're not paying any taxes later, you pay a little bit or not pay any if you're under that one scenario, and off you go for not just you. Obviously, you're in inheritance forever, right? Yeah. And there's other reasons to anticipating tax bracket and tax rate changes.

Have I got time for one more point? You do. Okay, so we want to talk about capital gains taxes. So let's say that you have like a rental house that you're going to sell or a piece of land that you've owned and you're going to sell it and you're going to receive a long term capital gain. And so those capital gains are taxed at even lower tax rates, typically unless they're real large.

But your average person who has this capital asset and they're going to sell it, they can pay capital gains taxes at the rate of either 0%, 15% or 20%. It's a good time to remind you that this show is brought to you by Cardinal Guide, cardinalguide.com, where we've got the seven worries tabs. Today's under the taxes, where you'll have all sorts of show notes and examples you can check there, as well as Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the contact information for Hans and Tom.

It's all there at cardinalguide.com. Thanks. Hans, great show.

Thank you, and God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and The Workbook. Once again, for dozens of free resources, past shows or to get Hans' book, go to cardinalguide.com. If you have a question, comment or suggestion for future shows, click on the Finishing Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.