The Internal Revenue Service (IRS) announced adjustments to inflation concerning tax brackets and deductions for the 2025 tax year on Tuesday. These changes could potentially allow Americans to retain more of their income next year.
Annually, the IRS revises the federal income tax brackets and the standard deduction among other tax policies to prevent "bracket creep," a situation where taxpayers find themselves in higher tax brackets due to increased income that doesn’t equate to enhanced purchasing power because of high inflation.
The annual inflation adjustments by the IRS impact taxpayers more significantly during periods of high inflation. This year, the IRS is adjusting the brackets upward by approximately 2.75%. In comparison, the previous year’s adjustment was 5.4%, reflecting the higher inflation seen in the U.S. economy during that period as opposed to the current year.
The adjustment results in new thresholds for various tax rates which could allow savings for millions of workers across different income brackets. Here are the changes announced by the IRS, which will take effect for the 2025 tax year, with returns to be filed in 2026.
Standard Deduction:
The standard deduction, which reduces the income subject to taxes, is claimed by most taxpayers. For single taxpayers, it will increase by $400 to $15,000, while for married taxpayers filing jointly it will rise by $800 to $30,000. Heads of households will have a standard deduction of $22,500 for the 2025 tax year, a $600 increase from the previous year.
Tax Brackets:
For single filers, the 2025 tax brackets are as follows:
- 10% for taxable income up to $11,925
- 12% for income over $11,925
- 22% for income over $48,475
- 24% for income over $103,350
- 32% for income over $197,300
- 35% for income over $250,525
- 37% for income over $626,350
Joint filers will have the following tax brackets:
- 10% for taxable income up to $23,850
- 12% for income over $23,850
- 22% for income over $96,950
- 24% for income over $206,700
- 32% for income over $394,600
- 35% for income over $501,050
- 37% for income over $751,600
Other Tax Provisions:
The IRS has also raised the thresholds for other deductions and credits, including the Earned Income Tax Credit (EITC), which will increase to $8,046 in 2025 for qualifying taxpayers with three or more qualifying children, up from $7,830 in 2024.
For the alternative minimum tax, the exemption amounts will rise to $88,100 for individuals and will start phasing out at $626,350 for unmarried individuals. For married couples filing jointly, the exemption will increase to $137,000, and phasing out will begin at $1,252,700.
Employees will also be able to contribute an extra $100 to health flexible spending accounts, with the limit for employee salary reductions rising to $3,300. Additionally, the minimum carryover amount for plans allowing unused funds to carry over into the next year will increase to $660.
