The IRS recently announced changes to the 2025 tax brackets, something that happens every year around this time. Because of the inflation adjustment, the new tax brackets may lower your income tax due in April 2026.
Note: These changes will impact the 2025 tax year for individuals.
Standard deduction will increase
There are seven individual income tax brackets in the United States, and each tax filer's top marginal income tax rate is based on their taxable income.
Individuals with a lower taxable income will be subject to a lower tax rate, and individuals with a higher taxable income will be subject to a higher tax rate.
The individual income tax rates range from 10% to 37% and taxable income brackets for each tax rate change each year based on inflation. These taxable income brackets will increase less in 2025 than in previous years.
For example, a single filer with a taxable income of $103,000 in 2024 will reach the 24% top marginal income tax bracket for 2024. If that individual reports the same taxable income of $103,000 in 2025, they will just barely avoid the 24% bracket and remain in the 22% top marginal income tax bracket for 2025 due to the inflation adjustment.
The standard deduction, which is a fixed dollar amount people can deduct from their adjusted gross income to get to their taxable income, was increased as well:
For individuals, the 2025 standard deduction rose from $14,600 to $15,000, an increase of $400.
For married couples filing jointly, the 2025 standard deduction rose from $29,200 to $30,000 (an increase of $800) and for people who file as head of household the 2025 standard deduction rose from $21,900 to $22,500 (an increase of $600). Increases that will help taxpayers lower their taxable income.
Don’t forget that, for individuals over the age of 65, there is an additional standard deduction amount available.
Gift and estate tax exclusion changes
The annual gift exclusion for 2025 has also increased, from $18,000 to $19,000. This means that an individual can gift, to as many people as they want in 2025, up to $19,000 without having to pay gift tax or report the gift on a gift tax return.
For example, a grandparent can give each grandchild $19,000 in 2025 without paying gift tax and without filing a gift tax return. The amount of the gift tax exclusion is double ($38,000) per year for married couples.
The estate tax exclusion has also been increased from $13.61 million to $13.99 million for individuals. However, the amount of estate taxes due per state varies, so it’s important to pay attention to where you live and know about any potential local estate tax laws.
Other changes to note
- Individuals with taxable income of $48,350 or less, and married couples filing jointly with taxable income of $96,700 or less, will qualify for a 0% long-term capital gains rate in 2025.
- Flexible spending accounts (FSA), which allow taxpayers to put pre-tax money aside to pay for medical expenses, can be funded with $3,300 in 2025 instead of $3,200.
- People who receive social security or disability benefit payments will receive an additional 2.5% as a cost-of-living adjustment (COLA), around $50 for the average recipient per month, starting in January of 2025.
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We hope you found this helpful. This article is for informational purposes only and is based on information available as of November 2024 and is based on information available through the IRS and is subject to change. This content is not intended to be used or acted upon with respect to any client's specific circumstances. For specific advice about your unique circumstances, consider talking with your qualified professionals.
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