IRS Releases Tax Inflation Adjustments for Tax Year 2025

The Internal Revenue Service (IRS) announced today the annual inflation adjustments for tax year 2025. The adjustments, detailed in Revenue Procedure 2024-40, will affect over 60 tax provisions and apply to tax returns filed in 2026. Below are the key changes for tax year 2025.

Standard Deduction Increases

• Single taxpayers and married individuals filing separately: The standard deduction rises to $15,000, an increase of $400 from 2024.
• Married couples filing jointly: The deduction increases to $30,000, up $800 from the previous year.
• Heads of households: The deduction will be $22,500, an increase of $600 from 2024.

Marginal Tax Rates

• The top tax rate remains 37% for single taxpayers with incomes over $626,350 and for married couples filing jointly with incomes over $751,600. Other rates are as follows:
  • 35%: for incomes over $250,525 (single); $501,050 (married filing jointly)
  • 32%: for incomes over $197,300 (single); $394,600 (married filing jointly)
  • 24%: for incomes over $103,350 (single); $206,700 (married filing jointly)
  • 22%: for incomes over $48,475 (single); $96,950 (married filing jointly)
  • 12%: for incomes over $11,925 (single); $23,850 (married filing jointly)
  • 10%: for incomes below $11,925 (single); $23,850 (married filing jointly)

Alternative Minimum Tax (AMT) Exemption

• The AMT exemption for unmarried individuals rises to $88,100, and for married individuals filing separately, it increases to $68,650. The phaseout begins at $626,350.
• For married couples filing jointly, the exemption increases to $137,000, with a phaseout starting at $1,252,700.

Earned Income Tax Credit (EITC)

• The maximum EITC for taxpayers with three or more qualifying children rises to $8,046, up from $7,830 in 2024. The revenue procedure includes detailed EITC amounts for other categories and income thresholds.

Other Adjustments

• Qualified transportation fringe benefit: Monthly limitations for transportation and parking rise to $325, up from $315 in 2024.
• Health flexible spending arrangements: The employee salary reduction contribution limit increases to $3,300, with a maximum carryover amount of $660.
• Medical savings accounts: The minimum annual deductible for self-only coverage rises to $2,850, with a maximum out-of-pocket expense of $5,700. For family coverage, the deductible rises to $5,700, with a maximum out-of-pocket expense of $10,500.
• Foreign earned income exclusion: Increases to $130,000 from $126,500 in 2024.
• Estate tax exclusion: Increases to $13,990,000 from $13,610,000 in 2024.
• Annual gift exclusion: Rises to $19,000, up from $18,000 in 2024.
• Adoption credit: The maximum credit for adopting a child with special needs increases to $17,280, up from $16,810 in 2024.

Unchanged Items

• Personal exemptions: Remain at 0 for tax year 2025, continuing the provision from the Tax Cuts and Jobs Act of 2017.
• Itemized deductions: There is no limitation on itemized deductions for tax year 2025.
• Lifetime learning credit: The phaseout threshold remains unchanged at $80,000 for single filers and $160,000 for joint filers.