Tax Compliance vs. Tax Planning: Which Is Right for You?
Tax Compliance is recording history, while Tax Planning is creating your optimized future to benefit you and your family.
Author: Matthew Williams CFP®, RICP®, CEXP®, CASL® | Director of Financial Planning at Impact Advisors Group
Are you familiar with how our federal tax code originated?
In 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Conservatives, hoping to thwart the idea, proposed passing the bill as they believed 75% of the states would not ratify the constitutional amendment, according to the National Archives.
To their surprise, the 16th Amendment was ratified in 1913, granting Congress the authority to impose a federal income tax. Originally, less than 1% of the population paid income taxes, and the tax rate was merely 1% of net income, thanks to generous exemptions and deductions.
Today’s Complexity
Things have changed since. They continue to change.
Late last year, the Internal Revenue Service provided detailed information on adjustments to more than 60 tax provisions that will impact taxpayers when they file their returns in 2026 for tax year 2025.
As incorporated into law, the IRS adjusts various categories to account for inflation. Annual inflation adjustments, however, do not cover all tax provisions.
Below, we will touch on the high points. If you have questions, please reach out to us. As always, if you have specific tax questions, feel free to consult with your tax advisor.
1. Tax brackets have changed. Table 1 highlights the seven tax brackets for 2025 for single, married, head-of-household, and married filing separately.
| Table 1: 2025 Tax Tables | ||||
| Taxable income | Base tax | Plus | Marginal tax rate | Of the amount over |
| Single | ||||
| 0 to $11,925 | + | 10% | ||
| $11,926-$48,475 | $1,192 | + | 12% | $11,925 |
| $48,476-$103,350 | 5,578 | + | 22% | $48,475 |
| $103,351-$197,300 | $17,651 | + | 24% | $103,350 |
| $197,301-$250,525 | $40,199 | + | 32% | $197,300 |
| $250,526 -$626,350 | $57,231 | + | 35% | $250,525 |
| >$626,350 | $188,770 | + | 37% | $626,350 |
| Married filing jointly and surviving spouses | ||||
| $0 to $23,850 | + | 10% | ||
| $23,851-$96,950 | $2,385 | + | 12% | $23,850 |
| $96,951-$206,700 | $11,157 | + | 22% | $96,950 |
| $206,700-$394,600 | $35,302 | + | 24% | $206,700 |
| $394,601-$501,050 | $80,398 | + | 32% | $394,600 |
| $501,051-$751,600 | $114,162 | + | 35% | $501,050 |
| >$751,600 | $202,154 | + | 37% | $751,600 |
Sources: Tax Foundation, IRS
Generally speaking, the rates in Table 1 are applied to taxable income—income less the standard deduction or itemized deductions, whichever is higher. In other words, if you are married and filing jointly and taxable income is $50,000, the first $23,850 is taxed at 10%, and the remaining income is taxed at 12%. This does not include tax credits or self-employment tax.
| Table 2: Estates and Trusts | ||||
| Taxable income | Base amount | Plus | Marginal tax rate | Of the amount over |
| $0 to $3,150 | + | 10% | ||
| $3,151-$11,450 | $315 | + | 24% | $3,150 |
| $11,451-$15,650 | $2,307 | + | 35% | $11,450 |
| >$15,650 | $3,777 | + | 37% | $15,650 |
Source: IRS
1. The standard rules apply to these four tax brackets. For example, if a trust has $10,000 in income during 2025, taxes would be calculated as follows:
2. For single taxpayers and married individuals filing separately for the tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024, according to the IRS.
For married couples filing jointly, the standard deduction rises to $30,000, up $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for 2024.
For single filers and heads of households age 65 and over, the additional standard deduction will rise from $1,950 in 2024 to $2,000 in 2025.
For 2025, married couples over 65 filing jointly, the additional deduction per qualifying spouse will increase from $1,550 in 2024 to $1,600 in 2025, a $50 increase per qualifying spouse. If both are older than 65, there is a total increase in their standard deduction of $100.
3. For tax year 2025, alternative minimum tax exemption amounts for unmarried individuals is $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350.
For married couples filing jointly, the exemption amount is $137,000 and begins to phase out at $1,252,700.
4. The maximum child tax credit is $2,000 per qualifying child. It is not adjusted for inflation. The refundable portion of the child tax credit is adjusted for inflation and will remain at $1,700 for 2025.
5. The gift and estate exemption for individuals in 2025 is $14.0 million, up from $13.6 million in 2024. The annual gift tax exclusion for 2025 is $19,000, up $1,000 in 2024, without using any of the lifetime gift and estate tax exemption.
6. Favorable treatment for long-term capital gains is a cherished tax break for investors. Long-term capital gains, such as the profit on the sale of a stock held for more than one year, are taxed at a more favorable rate than short-term gains. A short-term gain is taxed as if it were ordinary income. Qualified dividends are also taxed at a lower rate.
| Table 3: 2025 Tax Rates on Long-Term Capital Gains and Qualified Dividends | |
| Taxable income | Tax rate |
| If taxable income falls below $48,350 (single/married-filing separately), $96,700 (joint), $64,750 (head of household), $3,250 (estates) | 0% |
| If taxable income falls at or above $48,350 (single/married-filing separately), $96,700 (joint), $64,750 (head of household), $3,250 (estates) | 15% |
| If income falls at or above $533,400 (single), $300,000 (married-filing separately), $600,050 (joint), $566,700 (head of household), $15,900 (estates) | 20% |
| 3.8% tax on lesser of net investment income or excess of MAGI over | |
| Married, filing jointly | $250,000 |
| Single | $200,000 |
| Married, filing separately | $125,000 |
Source: IRS
7. The Tax Cuts and Jobs Act (TCJA) of 2017 includes a 20% deduction for pass-through businesses. Limits on the deduction begin phasing in for taxpayers with income above $197,300 (or $394,600 for joint filers) in 2025. This compares to income above $191,950 and $383,900, respectively, for joint filers in 2024.
8. Other taxes you may be subject to or credits you may capture.
The available adoption credit begins to phase out for taxpayers with a modified adjusted gross income above $259,190. It is completely phased out for taxpayers with a MAGI of $299,190 or more.
The credit is non-refundable, so the amount cannot exceed your tax liability. However, you may apply any excess credit amount to future years, up to five years.
IRA Contributions
The IRA contribution limit for 2024 and 2025 is $7,000 for those under age 50, and $8,000 for those age 50 or older.
This is up from 2023’s limits of $6,500 for those under age 50, and $7,500 for those age 50 or older. You can make 2025 IRA contributions until your April 15 federal tax deadline for income earned in 2025.
SEP-IRA Limits
The SEP-IRA contribution limit for 2025 is 25% of an employee’s total compensation, up to $70,000, and up $1,000 from 2024. Contributions may only be made by employers.
If you are self-employed, you may make an employer contribution on your own behalf. If you’re self-employed, your contributions are generally limited to 20% of your net income.
Changes May Be on the Horizon
The TCJA significantly increased the standard deduction, simplifying the filing process, as it eliminated the need for many taxpayers to itemize. But it also scrapped the personal exemption.
Unless extended, please be aware that many provisions of the TCJA will expire at the end of 2025. Republicans generally favor a broad extension of the TCJA. However, it is uncertain how negotiations will eventually play out regarding key provisions. Any changes will be implemented for tax year 2026.
Expected changes if the TCJA is allowed to sunset:
The personal exemption will be reinstated and valued at about $5,300, per the Tax Foundation.
We are mindful that the tax code is quite complex. We are happy to answer any questions you may have. Feel free to consult with your tax advisor.
Tax Compliance is recording history, while Tax Planning is creating your optimized future to benefit you and your family.
The S&P 500 has now had two back-to-back years of 25%+ returns. This is something that hasn’t happened since 1998.
IAG believes business owners would improve the odds of financial success by actively engaging with a personal CFO.
The goal of a cost segregation study is to identify and reclassify the various components of a property to take advantage of shorter depreciation periods.