The IRS has released its annual inflation adjustments for the 2025 tax year, providing crucial updates for taxpayers planning to file their returns in 2026. These adjustments impact over 60 tax provisions, including changes to standard deductions, tax brackets, and various credits. Here’s a quick overview of what’s new for tax year 2025.
1. Standard Deductions:
Single and married individuals filing separately: $15,000 (up $400 from 2024).
Married couples filing jointly: $30,000 (up $800).
Heads of households: $22,500 (up $600)
2. Tax Brackets: The IRS has updated income thresholds for the marginal tax rates, with the top rate of 37% applying to individuals earning over $626,350 ($751,600 for married couples). Other brackets have also been adjusted for inflation, ensuring that taxpayers’ income is taxed at appropriate levels.
3. Earned Income Tax Credit (EITC): The maximum EITC for those with three or more qualifying children increases to $8,046, up from $7,830 in 2024, providing additional support for low- and moderate-income earners.
4. Health & Medical Savings: Health flexible spending accounts (FSAs) will have a higher contribution limit of $3,300 (up from $3,200) and medical savings account (MSA) limits also rise, with self-only coverage deductibles increasing to $2,850, and family coverage deductibles rising to $5,700.
5. Foreign Earned Income Exclusion: The exclusion for foreign earned income rises to $130,000, up from $126,500 in 2024, helping expats reduce their U.S. taxable income.
6. Estate and Gift Tax: The estate tax basic exclusion amount increases to $13.99 million, and the annual gift exclusion rises to $19,000, offering additional tax relief for those planning their estates or making gifts.
Certain provisions, such as personal exemptions and limitations on itemized deductions, remain unchanged due to prior reforms, including the Tax Cuts and Jobs Act of 2017. Notably, the personal exemption remains at zero, and there are no adjustments to the Lifetime Learning Credit’s income phase-out thresholds.
These updates reflect the IRS's response to inflation and its ongoing effort to adjust tax provisions in line with the cost of living. Taxpayers will benefit from larger standard deductions, potentially reducing their taxable income and overall tax burden. Meanwhile, the increases in various credits and savings limits provide additional financial flexibility for households across the country.
For further details, consult the IRS’s official announcement by clicking here.
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