The IRS has released its annual adjustments for the 2025 tax year, offering critical updates for taxpayers as they prepare for the 2026 filing season. The changes, outlined in Revenue Procedure 2024-40, encompass over 60 tax provisions, impacting income, deductions, credits, and more. Here’s a breakdown of the key adjustments for 2025 that will affect individual and business taxpayers.
Standard Deduction Increases
The standard deduction, which significantly impacts the taxable income of many individuals, is set to rise for 2025:
- Single filers and married individuals filing separately: The standard deduction increases to $15,000, up by $400 from 2024.
- Married couples filing jointly: The standard deduction climbs to $30,000, marking an $800 increase.
- Heads of households: The standard deduction increases to $22,500, a $600 rise from the previous year.
This increase will reduce taxable income for eligible taxpayers, potentially lowering their overall tax liability.
Updated Marginal Tax Rates
For 2025, the IRS has adjusted the income thresholds for its marginal tax rates. The highest rate remains 37%, applied to individual incomes exceeding $626,350, or $751,600 for married couples filing jointly. The new rates are as follows:
- 10% for income up to $11,925 ($23,850 for married couples)
- 12% for income between $11,925 and $48,475 ($23,850 to $96,950 for married couples)
- 22% for income between $48,475 and $103,350 ($96,950 to $206,700 for married couples)
- 24% for income between $103,350 and $197,300 ($206,700 to $394,600 for married couples)
- 32% for income between $197,300 and $250,525 ($394,600 to $501,050 for married couples)
- 35% for income between $250,525 and $626,350 ($501,050 to $751,600 for married couples)
- 37% for income exceeding $626,350 ($751,600 for married couples)
These adjustments, linked to inflation, will help ensure that taxpayers aren’t pushed into higher brackets simply due to inflationary increases in wages.
Alternative Minimum Tax (AMT) Exemption
The AMT exemption amounts for 2025 have also been adjusted:
- Unmarried individuals: The exemption rises to $88,100, up from $84,000.
- Married individuals filing separately: The exemption increases to $68,650, up from $64,500.
- Married couples filing jointly: The exemption climbs to $137,000, an increase of $4,000 from 2024.
Additionally, the phase-out thresholds for these exemptions have been adjusted. For single filers, the exemption begins to phase out at $626,350, and for married couples filing jointly, the phase-out begins at $1,252,700.
Earned Income Tax Credit (EITC)
For 2025, the maximum Earned Income Tax Credit (EITC) available for taxpayers with three or more qualifying children increases to $8,046, up from $7,830 in 2024. The increase in the EITC reflects the annual inflation adjustments, helping provide additional support for low- and moderate-income earners.
Other Key Adjustments
- Qualified Transportation Fringe Benefits: The monthly limit for qualified transportation and parking benefits rises to $325, an increase from $315 in 2024.
- Health Flexible Spending Accounts: The limit for salary reductions contributing to health flexible spending arrangements (FSAs) rises to $3,300, up from $3,200. Additionally, the carryover amount for unused contributions increases to $660 from $640.
- Medical Savings Accounts: For 2025, the self-only coverage deductible for medical savings accounts rises to $2,850 (up $50), while the family coverage deductible rises to $5,700 (up $150). The out-of-pocket expense limits for both plans have been adjusted upward as well.
- Foreign Earned Income Exclusion: For individuals working abroad, the exclusion for foreign earned income rises to $130,000, up from $126,500.
- Estate Tax Exclusion: The exclusion for estates of decedents who pass away in 2025 will be $13,990,000, up from $13,610,000 in 2024.
- Annual Gift Exclusion: The amount that individuals can gift annually without triggering gift taxes rises to $19,000, an increase from $18,000 in 2024.
- Adoption Credit: The maximum adoption credit for special needs children increases to $17,280, up from $16,810 in 2024.
Items That Remain Unchanged
Despite the inflation adjustments, certain provisions remain the same:
- Personal Exemptions: Personal exemptions continue to be set at zero for 2025, as the Tax Cuts and Jobs Act of 2017 eliminated them.
- Itemized Deductions: The limitation on itemized deductions, which was previously in place, has been eliminated by the Tax Cuts and Jobs Act. Therefore, no such limitation applies for 2025.
- Lifetime Learning Credit: The income thresholds for the Lifetime Learning Credit, which determines eligibility for reduced credits based on modified adjusted gross income, remain unchanged.
Conclusion
The IRS’s inflation adjustments for the 2025 tax year reflect a modest increase across various provisions, benefiting taxpayers by raising income thresholds, increasing deductions, and boosting credits. While these adjustments help keep pace with inflation, it’s crucial for taxpayers to stay informed about these changes to make the most of their tax strategies. Understanding these updates and leveraging them in tax planning can significantly impact your financial strategy for the upcoming tax season.
For personalized advice and further clarification, consider consulting a tax professional to ensure you’re making the most of these adjustments and optimizing your tax filings for 2025.
