As we approach 2025, the IRS has introduced inflation-adjusted updates across various tax provisions. These annual adjustments aim to prevent "bracket creep," where inflation could push taxpayers into higher tax brackets without a genuine increase in their purchasing power. This year’s changes reflect lower inflation levels than recent years, resulting in a more modest 2.8% bracket increase, compared to 7% in 2023 and 5.4% in 2024.
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New Tax Brackets for 2025
In a progressive tax system like the U.S., income is taxed in portions, with higher rates applied only to additional income above certain thresholds. For 2025, each tax bracket’s income threshold has increased by approximately 2.8%:
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Tax Rate | 2024 (Single Filers) | 2025 (Single Filers) | 2024 (Married Filing Jointly) | 2025 (Married Filing Jointly) |
10% | $0 - $11,600 | $0 - $11,925 | $0 - $23,200 | $0 - $23,850 |
12% | $11,601 - $47,150 | $11,926 - $48,475 | $23,201 - $94,300 | $23,851 - $95,950 |
22% | $47,151 - $100,525 | $48,476 - $103,350 | $94,301 - $201,050 | $96,951 - $206,700 |
24% | $100,526 - $191,950 | $103,351 - $197,300 | $201,051 - $383,900 | $206,701 - $394,600 |
32% | $191,951 - $243,725 | $197,301 - $250,525 | $383,901 - $487,450 | $394,601 - $501,050 |
35% | $243,726 - $609,350 | $250,526 - $626,350 | $487,451 - $731,200 | $501,051 - $751,600 |
37% | $609,351 and up | $626,351 and up | $731,201 and up | $751,601 and up |
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This progressive approach means that income is only taxed at each bracket’s rate as it falls within that range. For instance, if a couple earns $100,000, only income over $96,950 will be taxed at the next bracket’s rate. Misconceptions around this can lead taxpayers to assume their entire income is taxed at their highest bracket, but in reality, each portion is taxed progressively.
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2025 Standard Deduction Increases
The IRS has also raised the standard deduction:
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Married Couples Filing Jointly: $30,000, up from $29,200 in 2024.
Single Filers and Married Filing Separately: $15,000, an increase from $14,600 in 2024.
Most taxpayers use the standard deduction rather than itemizing, as it often results in a greater tax reduction. For example, a married couple earning $100,000 would reduce their taxable income to $70,000 using the 2025 standard deduction, rather than potentially lower deductions achieved through itemization.
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Capital Gains Adjustments
Capital gains thresholds, which apply to profits from asset sales, have also seen a slight inflation adjustment:
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0% Rate: Applies to individuals earning up to $48,350 or married couples up to $96,700.
15% Rate: For single filers between $48,350 and $533,400 and married couples earning from $96,700 to $600,050.
20% Rate: For those earning above these amounts.
These adjustments benefit low- to middle-income taxpayers, as many may qualify for a 0% rate on capital gains.
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Estate Tax and Tax-Free Gifts
The federal estate-tax exclusion and gift allowances have also been adjusted:
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Estate Tax Exclusion: Increased to $13.99 million from $13.61 million in 2024.
Gift Tax Exclusion: The tax-free gift limit rises to $19,000 per individual (up from $18,000).
These adjustments can benefit businesses and individuals involved in estate planning, allowing larger estates to avoid federal estate taxes and increasing annual tax-free gift-giving limits.
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Earned Income Tax Credit (EITC)
The EITC, a credit for low- to middle-income workers, has been updated to reflect inflation:
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Single Filers: Maximum credit rises to $649 (up from $632).
Families: Households with three or more children can claim a maximum of $8,046, up from $7,830 in 2024.
The EITC can help ease the tax burden on lower-income earners by either reducing tax liabilities or providing a refund, depending on their total tax owed.
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Key Provisions Remaining Unchanged
Some tax provisions are not adjusted for inflation and remain constant, including:
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State and Local Tax (SALT) Deduction Cap: The deduction remains capped at $10,000, unchanged from prior years.
Child Tax Credit: Continues at $2,000, with $1,700 refundable for eligible taxpayers.
Lifetime Learning Credit: Phase-out thresholds remain at $80,000 for single filers and $160,000 for joint filers.
These unchanged provisions mean that while inflation may have impacted other areas of the tax code, the limits on SALT deductions, Child Tax Credits, and education credits remain static.
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