Soaring IRS Adjustments for 2025

December 1, 2024

The IRS has announced its annual inflation adjustments for tax year 2025, which will impact many taxpayers when they file their tax returns in 2026. These changes aim to keep pace with inflation, helping taxpayers with tax relief and altering several key tax provisions. Here's a breakdown of the most important adjustments and what they might mean for you.

Standard Deduction Increases

The standard deduction is going up across the board, which means lower taxable income for those who take the standard deduction rather than itemizing: 

• Single & Married Filing Separately:  $15,000 (up $400 from 2024) 
• Married Filing Jointly:  $30,000 (up $800 from 2024) 

• Head of Household:  $22,500 (up $600 from 2024) 

Marginal Tax Rate Adjustments

The marginal tax rates remain the same, but the income thresholds for each bracket have increased. Here are the tax brackets for 2025: 

• 10%: Up to $11,925 for single filers ($23,850 for married couples)
• 12%: Income over $11,925 ($23,850 for married couples)
• 22%: Income over $48,475 ($96,950 for married couples)
• 24%: Income over $103,350 ($206,700 for married couples)
• 32%: Income over $197,300 ($394,600 for married couples)
• 35%: Income over $250,525 ($501,050 for married couples)

• 37%: Income over $626,350 ($751,600 for married couples) 

 

Earned Income Tax Credit (EITC) Adjustments

The Earned Income Tax Credit, which provides tax relief for low- to moderate-income working families, will also increase. The maximum EITC is $8,046 (up from $7,830 in 2024)

  

Qualified Transportation and Health Benefits

For those who use commuter benefits or health-related spending accounts, adjustments are coming as well: 

• Qualified Transportation Benefits: Monthly limit increases to $325 (up from $315). 

• Health Flexible Spending Account (FSA) Limit: $3,300 (up from $3,200), with a maximum carryover of $660 (up from $640).

Medical Savings Accounts (MSAs) will see both deductible and out-of-pocket limits go up in 2025, making it easier for families to budget for medical expenses:

Other Important Adjustments 

• Foreign Earned Income Exclusion: Increased to $130,000 (up from $126,500 in 2024). 

• Estate Tax Exemption:  Raised to $13,990,000 (up from $13,610,000). 

• Gift Exclusion: Annual limit per recipient is $19,000 (up from $18,000). 
• Adoption Credit:  Maximum credit now $17,280 (up from $16,810). 

 

Unchanged Tax Items for 2025 

Some tax items remain unchanged in 2025, as they are not currently adjusted for inflation by law. 

• Personal Exemptions: For 2025, the personal exemption remains at $0, as it has since 2018, due to provisions in the Tax Cuts and Jobs Act of 2017. 
• Itemized Deductions: There continues to be no limitation on itemized deductions for 2025. This change, also part of the 2017 Tax Cuts and Jobs Act, has remained in place since 2018. 
• Lifetime Learning Credits: The income threshold for reducing the Lifetime Learning Credit is not adjusted for inflation. For 2025, the credit phases out for taxpayers with modified adjusted gross incomes above $80,000 ($160,000 for joint filers), consistent with prior years since the inflation adjustment was eliminated in 2020. 

 

These changes offer expanded savings and credits for many, from increased deduction and credit limits to higher thresholds for various tax benefits. They’ll make a difference to most taxpayers, whether it's a larger EITC or lower tax bill through a higher standard deduction. As tax season  approaches, consider using these adjustments as part of your tax planning strategy.