The IRS on Tuesday announced its new inflation-adjusted tax brackets for 2025, with the annual income thresholds rising by about 2.8% from 2024 — the smallest jump in several years.
The IRS each fall announces inflation-adjusted changes to the tax brackets and dozens of other provisions for the following tax year. Because inflation jumped during the pandemic, the bracket adjustments were larger in the past few years, reaching 7% in 2023 and 5.4% in the current year.
The idea is to protect taxpayers from “bracket creep” — when workers are pushed into higher tax bands due to the impact of cost-of-living adjustments aimed at offsetting inflation — without a change in their standard of living.
“Bracket creep occurs when inflation, rather than real increases in income, pushes people into higher income tax brackets or reduces the value they receive from credits and deductions,” Alex Durante, an economist at the Tax Foundation, noted in a Tuesday blog.
But with U.S. inflation cooling to its lowest level in three years, the IRS’ annual adjustments are likewise becoming smaller.
For instance, the new threshold for the 10% tax bracket for married couples filing jointly will rise to $23,850 in 2025, a 2.8% increase from its 2024 threshold of $23,200.
New standard deduction for 2025
The standard deduction in 2025 will rise to $30,000 for married couples filing jointly, a roughly 2.7% increase from the current tax year’s $29,200. Meanwhile, single filers and married couples filing separate returns will see their standard deduction rise to $15,000 from this year’s $14,600.
The standard deduction, which is used to reduce an individual’s taxable income, is relied on by a majority of taxpayers, according to the Tax Policy Center. A married couple earning a combined $100,000 could use the 2025 standard deduction to reduce their taxable income to $70,000 for instance.
The other option is to itemize one’s annual tax deductions, but most people’s deductions aren’t large enough to exceed the standard deduction, which is why most taxpayers opt for the latter.
How tax brackets work
Taxation in the U.S. is progressive, meaning that tax rates increase as people earn more money. But some people incorrectly believe that their top rate is what they’ll pay on all of their income. Instead, the brackets represent the percentage you’ll pay in taxes on each portion of your income.
For instance, married taxpayers who file jointly and earn more than $23,850 (the top threshold for the 10% bracket in 2025) could owe $2,385 in federal income tax — or 10% of their first $23,850 in earnings — and then 12% on any income above that amount, up to $96,950. (However, in reality, a couple in these brackets may owe little or get a refund due to the standard deduction as well as other deductions and tax credits.)
New capital gains thresholds for 2025
The IRS also adjusts the income thresholds for paying various capital gains tax rates for inflation, with low-income and some middle-income taxpayers enjoying a 0% tax rate on sales of stocks or other assets that have appreciated in value.
In 2025, the 0% tax rate will cover individuals who earn up to $48,350 and married couples who earn up to $96,700. Single filers who earn between $48,350 and $533,400 will pay a 15% rate, and those earning above $533,400 will pay 20%.
Married couples who earn between $96,700 to $600,050 will pay 15%, while those earning above the latter figure will pay 20%.
Estate tax and tax-free gifts
Next year, the federal estate-tax exclusion amount, which is the dollar figure for how much in assets can be sheltered from the estate tax, will rise to $13.99 million from $13.61 million in 2024.
And in 2025, people will be able to give others up to $19,000 on a tax-free basis, up from $18,000 this year.
The Earned Income Tax Credit
This tax credit, aimed at low- to middle-income workers with children, is also adjusting for inflation in 2025. That means that single people who qualify can claim $649 on their tax returns, about 2.7% higher than this year’s $632.
The maximum EITC that a family can claim next year is $8,046, up from $7,830 this year, but that only covers qualifying households with three or more children.
What’s not changing in 2025
There are some provisions that aren’t adjusted annually for inflation, which means they’ll be unchanged next year compared with the current year.
They include:
- The SALT deduction cap of $10,000, which will remain the same
- The Child Tax Credit of $2,000, with a refundable amount of $1,700, the same as in 2024
- The Lifetime Learning Credit, which is phased out for taxpayers with modified adjusted gross income over $80,000 for single filers or $160,000 for joint filers, the same as for the current year.
