IRS Announces Inflation Adjustments for Tax Year 2025

The Internal Revenue Service (IRS) has published Revenue Procedure 2024-40, detailing significant inflation adjustments for the 2025 tax year, which will affect various tax provisions when taxpayers file their returns in 2026.

Key Changes for Tax Year 2025

• Marginal Tax Rates: The highest tax rate for individuals remains at 37 percent for incomes over $626,350 for single filers, with adjustments made to other tax brackets, including:
  • 35 percent for incomes over $250,525 ($501,050 for married couples filing jointly).
  • 32 percent for incomes over $197,300 ($394,600 for married couples filing jointly).
  • 24 percent for incomes over $103,350 ($206,700 for married couples filing jointly).
  • 22 percent for incomes over $48,475 ($96,950 for married couples filing jointly).
  • 12 percent for incomes over $11,925 ($23,850 for married couples filing jointly).
  • 10 percent for incomes $11,925 or less ($23,850 or less for married couples filing jointly).
• Estate and Gift Tax: Both the basic exclusion amount for estate tax and the annual exclusion for gifts have been raised.
  • The estate basic exclusion will be $13,990,000 for 2025.
  • The annual exclusion for gifts will increase to $19,000.
• Standard Deductions: The standard deduction for single taxpayers and married individuals filing separately will increase to $15,000, up from $14,600 in 2024. For married couples filing jointly, the standard deduction will rise to $30,000, compared to $29,200.
• Alternative Minimum Tax (AMT) Exemption: The exemption amounts for the AMT will see an increase for both single taxpayers and married couples filing jointly.
• Earned Income Tax Credit (EITC): The maximum EITC for qualifying taxpayers with three or more qualifying children will increase to $8,046, up from $7,830.
• Qualified Transportation Fringe Benefits: The monthly limit for qualified transportation fringe benefits and parking will rise to $325.
• Health Flexible Spending Arrangements (FSAs): The contribution limit for employee health FSAs will increase to $3,300.
• Medical Savings Accounts (MSAs): The limits for deductible and out-of-pocket expenses for MSAs have been adjusted.
• Foreign Earned Income Exclusion: The exclusion amount will increase to $130,000, up from $126,500.
• Adoption Credits: The maximum credit for adopting a child with special needs has been updated.

Provisions Remaining Unchanged

Certain provisions will remain the same for tax year 2025, including:

• Personal Exemptions: Personal exemptions will continue to be set at zero.
• Itemized Deductions: There will be no limitations on itemized deductions.
• Lifetime Learning Credits: The modified adjusted gross income threshold for the Lifetime Learning Credit remains unchanged.

For further details on these adjustments, contact your Windham Brannon advisor today, or reach out to Barbara Coats.