IRS Announces Lower Interest Rates for 1st Quarter of 2025

The Internal Revenue Service (IRS) in Washington, on Aug. 12, 2024. Madalina Vasiliu/The Epoch Times

The IRS has announced a reduction in interest rates for tax overpayments and underpayments for the first quarter of 2025.

Starting on Jan. 1, 2025, the annual interest rate for individual overpayments and underpayments will decrease to 7 percent, compounded daily, according to a Nov. 18 announcement from the tax agency. This marks a drop from the 8 percent rate that has been in effect in recent quarters.

Corporate taxpayers will see their overpayment rate set at 6 percent, while the portion of corporate overpayments exceeding $10,000 will accrue interest at 4.5 percent. The rate for large corporate underpayments will be 9 percent.

Interest rates for tax overpayments and underpayments are tied to the short-term applicable federal rate (AFR) plus a set number of percentage points. According to an IRS notice, the latest drop in rates is due to the recent reduction in the short-term AFR to 4 percent.

For taxpayers other than corporations, the overpayment and underpayment interest rate is the short-term AFR plus 3 percentage points. For corporations, the underpayment rate is the short-term AFR plus 3 percentage points, while the overpayment rate is the short-term AFR plus 2 percentage points. For large corporate underpayments, the rate increases to the short-term AFR plus 5 percentage points. On corporate overpayments exceeding $10,000, the rate is the short-term AFR plus 0.5 percentage points.

In other tax-related developments, the IRS recently announced an increase in retirement contribution limits for 2025 to reflect inflation-related cost-of-living adjustments.

Employees in 401(k), 403(b), and 457 plans and the Thrift Savings Plan can now contribute up to $23,500, up from $23,000 in 2024. The catch-up limit for those aged 50 and older remains at $7,500, allowing total contributions of $31,000. Workers aged 60 to 63 benefit from a higher catch-up limit of $11,250.

For individual retirement accounts (IRAs), the base contribution limit stays at $7,000, with a $1,000 catch-up limit for those aged 50 and older, totaling $8,000. However, income phase-out ranges for IRA deductions and Roth IRA eligibility have increased, with Roth IRA income limits now at $150,000–$165,000 for single filers and $236,000–$246,000 for joint filers.

SIMPLE account contribution limits rise to $16,500, with a $3,500 catch-up for those aged 50 and above and a higher $5,250 catch-up for workers aged 60 to 63.

The IRS has also increased the contribution limit for health care flexible spending arrangements (FSAs) for 2025. An FSA is a savings account funded through payroll deductions that is used to cover eligible medical expenses such as copayments, dental care, and prescriptions not covered by health insurance.

Employees can now contribute up to $3,300, up from $3,200 in 2024. Additionally, spouses with separate FSAs can each contribute the full limit. Households will not have to pay tax on those contributions. The maximum carryover for unused FSA funds will rise to $660 in 2025, up from $640.