The IRS has announced its annual inflation adjustments for the 2025 tax year, which will impact the taxes you will file in 2026. These updates, outlined in Revenue Procedure 2024-40, cover more than sixty tax provisions. Below are key changes you should be aware of.

Key Changes for 2025 Tax Year:

Standard Deductions - The set amount you can subtract from your taxable income, reducing how much income you’re taxed on.

• Single filers and those married filing separately: $15,000 (up $400 from 2024)
• Married couples filing jointly: $30,000 (up $800 from 2024)
• Heads of household: $22,500 (up $600 from 2024)

Tax Brackets and Marginal Rates - Different percentages of tax applied to portions of your income. Higher income means higher tax rates for each bracket.

• 37% for incomes over $626,350 (single) or $751,600 (married filing jointly)
• 35% for incomes over $250,525 (single) or $501,050 (married filing jointly)
• 32% for incomes over $197,300 (single) or $394,600 (married filing jointly)
• 24% for incomes over $103,350 (single) or $206,700 (married filing jointly)
• 22% for incomes over $48,475 (single) or $96,950 (married filing jointly)
• 12% for incomes over $11,925 (single) or $23,850 (married filing jointly)
• 10% for incomes below $11,925 (single) or $23,850 (married filing jointly)

Alternative Minimum Tax (AMT) Exemption - A parallel tax system ensuring that high earners pay at least a minimum amount of tax, even with deductions. The exemption reduces how much of your income is subject to AMT.

• Unmarried individuals: $88,100
• Married filing jointly: $137,000

These exemptions start to phase out at $626,350 and $1,252,700, respectively.

Earned Income Tax Credit (EITC) - A tax credit for low- to moderate-income workers, particularly those with children, to reduce taxes owed or increase refunds.

• The maximum EITC for taxpayers with three or more qualifying children is $8,046, up from $7,830 in 2024.

Qualified Transportation Fringe Benefit - A tax-free benefit for employees who use public transit or pay for parking as part of commuting.

• The monthly limit for 2025 is $325 (up from $315 in 2024).

Health Flexible Spending Accounts (FSA) - Allows employees to set aside pre-tax money for medical expenses. The limit is the maximum amount you can contribute.

• The 2025 contribution limit for employee salary reductions rises to $3,300 (up from $3,200 in 2024). The carryover amount also increases to $660 (up from $640).

Medical Savings Accounts (MSA) - A tax-advantaged savings account for individuals enrolled in high-deductible Medicare plans.

• Self-only coverage: deductible must be between $2,850 and $4,300
• Family coverage: deductible between $5,700 and $8,550

The out-of-pocket limit for self-only coverage is now $5,700, while for family coverage it’s $10,500.

Health Savings Accounts (HSA) - A tax-advantaged savings account for individuals with high-deductible private health plans.

• Self-only coverage: The annual deduction limit for individuals with self-only coverage under a high-deductible health plan is $4,300.
• Family coverage: The annual deduction limit for individuals with family coverage under a high-deductible health plan is $8,550.

Foreign Earned Income Exclusion - Excludes a portion of income earned abroad from U.S. taxes, beneficial for expatriates.

• The amount rises to $130,000, up from $126,500 in 2024.

Estate and Gift Tax - Limits on how much value you can transfer to heirs or others without incurring estate or gift taxes.

• Estate exclusion: $13,990,000
• Annual gift exclusion: $19,000

Adoption Credit - A credit to help cover the costs of adopting a child, reducing taxes owed.

• The maximum credit increases to $17,280 (up from $16,810 in 2024).

What Remains Unchanged for 2025

• Personal Exemptions: Remain at 0, as has been the case since the 2017 Tax Cuts and Jobs Act. 
• Itemized Deductions: No limitation, as the cap was removed by the same 2017 act.
• Lifetime Learning Credit: No inflation adjustment; income phase-out thresholds remain at $80,000 for individuals and $160,000 for joint filers.

These changes are designed to account for inflation and help adjust your taxes accordingly. Make sure to keep these updates in mind as you plan for the next tax year!

Disclaimer:
The information in this blog applies to tax year 2025, which will affect returns filed in 2026. For your next tax filing (April 2025) (covering tax year 2024), please follow the rules for tax year 2024. Consult a tax professional if you have any questions about your specific situation.
This blog is for informational purposes only and not intended to be taken as professional advice. Always consult a qualified professional for specific guidance. While we aim to keep information accurate and current with 2024 tax regulations, be sure to review guidelines annually for updates as they frequently change. 

Sources: https://www.irs.gov/pub/irs-drop/rp-24-40.pdf https://content.govdelivery.com/accounts/USIRS/bulletins/3bd9a61?reqfrom=share