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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.

This article, “IRS Releases Tax Inflation Adjustments for Tax Year 2025” was first published on Small Business Trends